Myth or reality — is fixed price the more economic method of contracting?


As a solicitor specialising in construction law, clients often ask me what form of contract they ought to enter into with builders.
The more frequent situation is that the builder is pushing for “charge-up” or “costs-plus-margin” forms of contracting. Typically, the advice given is that a home owner ought to contract on a fixed price basis.

I suppose considering those two opposing contracting forces, one could readily assume that builders are going to do better out of a charge-up contract as they get to charge for actual time worked and work completed, and that fixed price works best for home owners in that they can keep a check on building costs such that they do not escalate.
But experience establishes that such an analysis is far too simplistic. And is there really such a thing as a fixed price contract these days?

In broad terms, every fixed price contract will include line items tagged out which the builder, for one reason or another, is not able or prepared to allocate a fixed price to. Further, some items may be allocated a prime cost sum and/or a provisional sum.
In the context of a leaky building remediation contract, this might be timber removal and replacement, or a large line item entitled “contingencies”.

But putting to one side that type of building contract, even a relatively simple home renovation that is completed on a fixed price is likely to have its value change just on the normal variations that a builder may claim for during the course of construction.

For example, it is not unheard of for a builder to identify borer while renovating a 1950s state house or, for that matter, to indentify failings of a concrete tile roof that needs to be remedied in the course of renovating the rest of a state house.
Both these changes to the scope of work are, in normal circumstances, going to be treated as a variation which will have a cost implication by increasing the value of the fixed price contract.
So in essence, I am not so sure any contract is truly fixed, and that those demanding a fixed price contract are potentially fooling themselves.

Arguments against contracting on a charge-up basis
The typical arguments I have heard in court or in negotiation are usually twofold:
• A competitive tender is the only way to get a true and fair market price for the building works, and
• If a builder is not held to a fixed price no adequate restraint is put on at least his cost of labour.

In response to the former, that argument seems to discount that it is still possible through tender to get a very distorted cost of building.
You may have a contractor coming in low who is attempting to buy a job or, alternatively, you may have a contractor with so much work on he can afford to miss the job and, thus, prices at a level which guarantees him a grand profit, on the off chance that he wins the contract.

If it happens to be those two contractors pricing one particular contract, those two prices are not providing you with the realistic cost of building.
Further, in response to the latter, this criticism of charge up seems to completely discount the need for a builder to service all his other contracts/clients, which would normally work against him unnecessarily prolonging a building contract.

There is also the not inconsiderable matter of a builder’s reputation that he no doubt strives to maintain. Just as an opening batsman is only as good as his last innings, so is a builder’s reputation only as good as his last job.

Over-charging the labour on a historic job will not stand him in good stead for winning the next contract.
It is also important not to totally dismiss the importance of estimates that would normally be required with a charge-up form of contracting.
Assuming sufficient detail was provided, the home owner could easily hold the contractor (generally) to that estimate, and where there was significant cost overrun, the contractor would have to substantiate his reasons for exceeding line items as estimated.

As touched upon in my May 2013 article, the personalities on both sides of the contract will ultimately determine the form of contract that is entered into. One form of contracting does not necessarily fit each set of circumstances and the individuals involved.It follows that it is not as simple as saying charge-up only serves the builder’s interests, and fixed price is the only form of contract that serves the home owner’s interests.
There are so many other variables that will ultimately determine which contract is the best fit for a particular scope of works.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.

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