Lump sum contract disputes and how to avoid them

Published: February 18, 2020
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Client disputes are part and parcel of running a construction business. It’s unavoidable. But whether or not your bottom line is hit hard is something you can avoid by putting in place the right protections from the outset.

Here we’ll run through the 4 most common sources of disputes arising from lump sum contracts and what you can do to avoid them and/or mitigate the fallout.

The big 4

1. An inappropriate contract for the scale of the project

Pair a complex project with an overly simple contract and the parties involved may interpret their responsibilities differently. Such assumptions will subject your project to increased risks, more frequent project changes and delays — the fallout from all of which will not be covered by your contract terms.

Pair a smaller scale project with an overly complex contract and the parties involved may not fully understand and fulfil their contractual obligations. Consequently, you and/or your client may end up in breach of contract.

 What’s the solution?

Before tender, consider exactly what needs to be covered in your contract. Start with a standard contract template (e.g. JCT, FMB, etc.) and identify any additional clauses that need to be added or any irrelevant clauses that need to be removed.

2. Ambiguous contract information

Ambiguity can arise on the part of the design team and/or you as the contractor. Unclear and imprecise contract information often leads to arguments once the project is underway, usually about what has or has not been included in the price. This applies to both the initial contract documentation and change instructions during the course of the project.

What’s the solution?

On your part, provide comprehensive, accurate and reliable cost estimates from the start and in response to any design changes requested. If time pressures make this a challenge to do yourself, consider hiring an estimator. Using an experienced third party for cost estimates can also add credibility to avoid disputes or pushback from clients on costs.

As for the design team, while you cannot prevent the provision of unclear designs, you can highlight ambiguities or omissions as early as possible to the contract administrator and log these communications to ensure a clear evidence trail.

3.  Ad-hoc and informal changes to contract requirements

Verbal, ad-hoc and informal changes to contract requirements often lead to arguments over the work and additional costs. When formal, pre-agreed channels of communication are not used for changes, it becomes difficult to establish who said what and when.

What’s the solution?

Prepare contract clauses specifying how change orders are to be managed and to what extent you can claim any delay damages. Importantly, ensure your team is clear on the channels of communication and do not act on any informal requests for changes that come their way. During the course of the project, ensure all changes are appropriately documented so there is sufficient evidence to back up additional charges.

4. Overpromising on what can be delivered

It’s easy to be too optimistic and/or lenient in the early stages of projects. Under pressure to maintain positive client relationships and keep projects on track, you may find yourself promising to claw back delays caused by the design team and client but ultimately struggle to deliver on this.

What’s the solution?

To prevent yourself bowing to pressure from clients, consider and calculate how delays are impacting your bottom line and your project schedule. With a realistic picture of what you can and cannot deliver on, you can more effectively manage client expectations. Overpromising to land or retain a project contract can ultimately leave you out of pocket.

Best practice going forward

Each of the scenarios above is avoidable when strong contracts and clear procedures are in place. Consistent documentation and tracking of project progress and changes are needed throughout the works. This can take a considerable amount of your time and focus, which is why it’s worth considering the help of an experienced construction consultant such as Multiproject.

We provide estimating, quantity surveying and contract management services to help contractors deliver projects on time and on budget while keeping disputes to a minimum. Call us on +44 (0) 20 7096 8235 to find out how we can help you.