Finding leeway in your lump sum contracts: how to vary prices
Lump sum contracts may be the bread and butter of the construction industry, with RIBA reporting that 86% of contractors frequently use traditional contracts, but they come with their own risks. Perhaps the most significant of those risks are the restrictions placed on varying prices and consequently the chances of your profit margins being reduced to nothing. While it is often expected to vary the project price, if contractual procedures aren’t followed to the letter, you won’t get paid for all changes and extra work carried out.
There are numerous mechanisms for varying prices, which when combined with careful documentation, can protect your bottom line.
7 ways to vary the contract sum
This covers all instructions to vary the design or quality of the work, the quantities of materials used or even the sequence in which the work is carried out. Most contracts will include a clause that allows the project architect or contract administrator to issue these instructions. As a contractor, you need to make sure all of these variations are carefully documented in terms of cost and time so you can accurately charge for the extra work.
2. Relevant events
This refers to events caused either by the client, such as delays in providing designs or instructions, or an external factor outside of your or the client’s control, such as adverse weather. In either case, the project is disrupted and you can, therefore, claim for losses and expenses.
3. Provisional sums
These terms refer to allowances for a specific element of the works which is not defined in enough detail for tenderers to price it. Consequently, once enough detail is provided, the project price will vary.
4. Prime cost sums
When the client nominates their own subcontractors or suppliers, a prime cost sum is included based on the subcontractor’s or supplier’s quote. You are then entitled to add a mark-up and attendance costs (e.g. scaffolding, handling of materials, clearance of rubbish), which will consequently vary the project price.
Fluctuations enable you to be reimbursed for changes in duties or taxes over the duration of projects that may last for several years.
6. Statutory fees
These are dependent on the contract but can include fees for planning applications, building regulations applications and licensing, as well as Land Registry fees.
7. Payments relating to the opening-up and testing of works
If the contract administrator suspects there are defects in the completed works, the contract will usually allow them to instruct inspections of the works to be carried out. This may require you to open up works that have already been covered over. If no defect is detected, you can claim for the additional costs and time.
Each of these reasons for varying the project price requires that all procedures set out in the contract are closely followed and enacted within the appropriate timeframe. Only then will you be ensured of receiving all extra payments due when you settle the account.
Multiproject’s contract management service will help you ensure this is exactly what happens on every project. Call us today on +44 (0) 20 7096 8235 to find out exactly how we can help you protect your profits through comprehensive contract management and administrative support.