Artboard 1Icon/UI/CalendarIcons/Ionic/Social/social-pinterestIcon/UI/Video-outline

Decoding design and construct contracts: Contract sum (part 1)

10 June 2022

#Construction, Infrastructure & Projects

Published by:

Andrea Wilson

Decoding design and construct contracts: Contract sum (part 1)

Australian Standards (AS) contracts are common place in the construction industry. Their uses range from minor work arrangements to large scale design and construct projects.

One of the most popular standards used today is the AS4902 standard form contract (known as AS 4902-2000 General Conditions of Contract for Design and Construct), intended for design and construction projects.

In this series, we will work through some of the key terms you may find in an AS4902 which are often the most heavily negotiated and amended before the contract concludes.

The first clause for consideration is the ‘Contract Sum’.

What is the Contract Sum?

The Contract Sum is the price paid to the contractor for the scope of work to be completed.

As a general rule, the Contract Sum will be stated in the formal instrument of agreement and can take the form of:

  • a lump sum figure
  • a schedule of rates (SoR)
  • a bill of quantities (BoQ).

If the Contract Sum is a lump sum figure, it is essentially the ‘starting point’ for the Contract Sum and the amount actually payable can change (subject to the adjustment events agreed between the parties).

However, a SoR and BoQ based Contract Sum does not provide a base amount and will be subject to the works actually completed. Therefore, the pricing for a SoR or BoQ based contract is generally determined by the quantity of work completed.

An SoR is less structured than a BoQ and generally won’t have fixed quantities expected to be met, whereas a BoQ will. That said, there can be some line items in your SoR and BoQ that are fixed, such as mobilisation or demobilisation costs.

Put simply, the Contract Sum needs to be responsive to the type of work that is actually being carried out and the price certainty the parties wish to achieve in relation to that work.

Can the Contract Sum change?

Even if you negotiate a fixed price or lump sum Contract Sum, the amount payable under a contract can fluctuate for a variety of reasons, such as (noting this is not an exhaustive list):

  1. the contractor has submitted a variation for an increase or a decrease to the Contract Sum due to a change in the work being performed
  2. the contract contains a provisional sum clause where, if the work related to that provisional sum is directed to be carried out, the price for that directed work is assessed by the superintendent. Sometimes the provisional sum can already be included in the calculation of the Contract Sum
  3. the contract contains a “rise and fall” clause that allows the contractor to make a claim for the rise of materials costs or reduce the amount payable based on a fall in those costs
  4. delay damages that may be due to the contractor if properly claimed.

Provisional sum and rise and fall clauses are becoming an increasingly common discussion point during contract negotiations due to the fluctuating cost of building materials and increased use of provisional sum allowances.

Fluctuations to the Contract Sum – what are the effects?

If there is a change to the Contract Sum, significant flow-on effects can include:

  1. a liquidated damages cap. Depending on whether or not this is included in your contract, the amount that may be claimed for liquidated damages may be restricted to a certain percentage of the value of the contract or Contract Sum. An increase in the Contract Sum may trigger an increase in the liquidated damages payable by the contractor under the cap
  2. delay damages caps. This is the same issue where a contractor or subcontractor may be restricted in claiming delay damages past a certain percentage of the Contract Sum. An increase in the Contract Sum may trigger an increase in the delay damages payable by the principal under the cap
  3. the principal may be able to request more security. This will depend on how the contract is drafted, but typically the security held is a certain percentage of the Contract Sum. The contract may allow the principal to demand more security if the amount payable increases through variations or provisional sums
  4. you may need to consider whether you need to open a Project Trust Account. If your project is based in Queensland, particular projects over a certain value (including if they increase throughout the project) will require the principal to establish a Project Trust Account. This is a requirement under the Building Industry Fairness (Security of Payment) Act 2017 (Qld).

Key considerations when negotiating the ‘Contract Sum’

When you’re at the final stage of your contract negotiations, make sure you keep the following in mind:

  1. how will you work out the final amount payable? Do you want a SoR, a BoQ or a fixed price? The type of project will help you determine what’s suitable
  2. what will trigger an adjustment to the Contract Sum or the value of your contract? Variations and delay costs are standard considerations, but you should also keep in mind costs related to latent conditions, material price increases, and costs incurred due to work suspensions or changes to legislation
  3. what rights and remedies flow from a change to the Contract Sum or value? Will any percentage caps be impacted, or are they fixed amounts? Will you be able to request or be liable to provide additional security if the price increases?
  4. are you close to the limit for Project Trust Accounts? A single variation could send you over the limit and require them to be set up for the project. Does your contract contain appropriate provisions to manage the transition if this occurs?

The above is only a brief look at some of the issues relevant to the value of your contract. If you need any further advice on pricing your contract, or other negotiation assistance, please contact us below or get in touch with our team here.

Authors: Jacqui Doyle & Andrea Wilson

  • Andrea Wilson is an Associate in our national Construction, Infrastructure & Projects group. This article was originally published in the June edition of Holding Redlich’s Junior In-House Monthly, which you can subscribe here.

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Andrea Wilson

Share this