REALWorld Law

Construction

'Fixed price contracts'

Is it possible for parties to enter into a construction contract where the price to be paid to the contractor is fixed?

Angola

Angola

Under Angolan law, the parties are entitled to enter into fixed price contracts. Fixed price is the rule in public works contracts. In such cases, the contractor carries out construction works (as detailed in one or more plans and/or specifications) against a fixed price agreed prior to the execution of the works. However, the contract must provide for price revision after one year of works in the event of a worsening of material and employment costs.

In principle, the contractor is not entitled to request additional payments. However, the agreed price may vary where the owner instructs variations in the works.

Australia

Australia

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

  1. Variations to the scope of works (either instructed by the employer, or necessary for some other reason)
  2. Other events which, should they occur and for which the contractor is not responsible would cause it to incur loss and damage, and
  3. Fluctuations in the price of material or labour.

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract. The employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy.

In essence, what parties usually mean when they talk about a ‘fixed price contract’ is a lump sum contract where the contractor’s entitlement to additional money is limited or controlled, for example there are no fluctuation provisions, or the events which would usually entitle the contractor to recompense for loss and expense are restricted or the developer retains strict control over the circumstances in which a change in price or scope may be directed or given.

Parties may often refer to a ‘guaranteed maximum price’ contract which, again, is unlikely ever to truly mean this – ‘employer changes’ and other possible occurrences will be excluded from the guaranteed maximum price figure.

Belgium

Belgium

Fixed price construction contracts are common. Such contracts determine that a contractor shall carry out construction works as detailed in one or more plans and/or documents, against a fixed price agreed prior to the execution of the works.

A distinction must be made between ‘firm fixed’ contracts (which contain a firm price as a whole that is not to be changed) and ‘variable fixed’ contracts, where the latter foresees a price list (with prior fixed prices for material, working hours) by which means the price of any additional work ordered by the principal will be determined.

The Law of 9 July 1971 which governs house construction and the sale of houses to be or being built, if applicable, imposes a prior fixed price regime on the execution of residential construction works.

Bosnia-Herzegovina

Bosnia-Herzegovina

Yes.

Canada

Canada

Yes, parties can enter into a ‘fixed price contract’, often referred to as a ‘lump sum’ or ‘stipulated price’ contract, for performance and completion of the construction work. However, although the price is fixed, the lump sum amount might be increased for certain reasons, including additional work that the owner would like the contractor to perform, differing site conditions, or force majeure (see allocation of risk).

Additional work causing an increase to a lump sum contract likely would be performed pursuant to a ‘change order’, which is an amendment to the contract signed by both owner and contractor providing for the additional work. Change orders should describe the change in the work and state any change in compensation or time as a result of the changed work.

In a lump sum contract, the contractor generally takes the risk of increases in the cost of labour and materials, but also benefits in the event of any decrease. In such a case, fluctuations in price or the labour force will not change the lump sum amount.

Absent the ability to add to or reduce the scope of work (and thereby increase or decrease the lump sum amount), an owner would not be able to make any material change to the project after execution of the contract, which is often too rigid for most owners. Thus, fixed price contracts generally have some mechanism where compensation can be changed under certain circumstances.

China

China

Yes, fixed price contracts can be used as Construction Project Contracts.

Croatia

Croatia

The Croatian Obligations Act (Zakon o obveznim odnosima, Official Gazette Nos. 35/05, 41/08, 125/11 and 78/15) regulates 'turnkey contracts' where the agreed price includes all unforeseeable and surplus works. The deficiency of works does not have an impact on the agreed price, unless the change of the scope of works has either been agreed by the contractual parties or has been caused by the client.

Czech Republic

Czech Republic

Yes, this is possible.

Denmark

Denmark

It is theoretically possible for the parties to enter a construction contract where the price is fixed, but the reality is that both the employer and the contractor want some flexibility in the contract.

The employer normally wants to have the right to instruct a contractor to carry out alterations and the contractor normally wants to have the right to undertake alterations that are requested for an additional payment.

Thus, it is very uncommon for the involved parties to enter a 'fixed price contract'.

France

France

Under French law, parties are entitled to enter into fixed price contracts. In such cases, the contractor carries out construction works (as detailed in one or more plans and/or documents) against a fixed price agreed prior to the execution of the works.

In principle, the contractor is not entitled to request additional money. However, the agreed price may vary where the owner instructs variations in the works.

Germany

Germany

In Germany it is possible for parties to enter into fixed price contracts (Pauschalvertrag), in which the parties agree on a total price for the carrying out and completion of the contract for work and services. In this case the remuneration of the contractor is determined before the start of the construction works. The relevant sections of the contracting rules for the procurement of public works (VOB/B) under which the remuneration is adjusted if additional costs exceed 10% of the amount originally agreed upon are not applicable. The contractor is paid the price irrespective of the actual work, unless the principal has made a request for additional services.

Fixed price contracts are usually agreed in relation to turnkey projects (schlüsselfertige Bauvorhaben). However, for large projects, a combination of fixed and unit prices may be agreed leading to a guaranteed maximum price.

From a practical standpoint, it is important to know that, although the law allows parties to agree on a fixed price, contractors are usually quite skilled at finding ways around the fixed price limit. In a typical construction project the contractor will issue several change requests and notifications of delay both aiming at establishing a reason to increase the price payable. The arguments are usually that there were unforeseen changes which require extra payment and that the principal delayed works by withholding decisions or not providing plans in time, etc.

Hong Kong

Hong Kong

It is possible and indeed quite common for the parties to enter into a lump sum contract, ie a contractor will receive payment of a fixed sum which has been agreed in advance upon completion of the whole contract works. Under this system, the design would be completed and the work would be quantified when a contractor submits its tender to the employer. This would have the benefit of ensuring uniformity and accuracy in the description of works.

However, if the scope of work under a lump sum contract is varied, the contractor will be paid an extra sum according to the contractual provisions in the contract (if any). In practice, the employer will usually pay more than the fixed amount stated in the contract to the contractor. This will happen if there are variations or a direct loss and expense claim due to the disturbance of regular progress of the works, or if there are fluctuations in the quoted rates. Usually, both employer and the contractor will want to have such flexibility built into the contract.

Hungary

Hungary

Yes, it is possible to enter into a fixed price construction contract. In fact, fixed price construction contracts are rather common in Hungary. In such cases, the contractor is not entitled to any additional money for works included in the design and the technical specifications.

Nevertheless, if there are any variations to the works instructed by the employer, the contractor may request compensation for such extra works.

Ireland

Ireland

"Fixed price contracts" are commonplace in Ireland. All standard forms of contract and usually bespoke forms provide for variation of works and scope which will affect a so-called fixed price contract. Irish standard forms and bespoke contracts generally include clauses that relate to fluctuations, events that may extend the time for performance and accordingly the price or employer instructed variations.

"Fixed price" means that the contract price will not be adjusted due to changes in the costs to the contractor in carrying out the works. Within such types of contract, the entitlement of the contractor to recover the costs of increases in labour or materials costs will be curtailed.

Clause 36 of the RIAI form of building agreement provides for variations to the price of materials and labour over the course of the term of the contract, however, this clause can be amended during contract negotiations, and will often be deleted in order to curtail the above mentioned entitlement of the contractor to recover the costs of increases in labour or materials costs.Clause 67 of the IEI form of engineering agreement also provides for this increase.

A "Lump sum" contract means that the contractor agrees to a sum to complete the entirety of the works contracted for. The use of a lump sum contract, in addition to a programme, allows for costs to be ascertained and included within the contract price.

The GCCC contract forms provide for a fixed price. The contractor must accept the risk of increasing price of labour, materials etc. The fixed price period varies depending on the price variation method in the contract. If a proven cost method is used, the fixed cost term is 30 months. If the formula fluctuation method is used, a 36-month period will apply.

Italy

Italy

The price can be agreed by the parties using different mechanisms, in particular the price can either be:

  • fixed in advance by the parties when the contract is executed, if the price is intended to be a fixed lump sum which refers to the entire work, or
  • determined on the basis of separate prices for certain parts of the works. The total cost is therefore only determined on completion of the works (by multiplying the price for the separate parts of work by the number of parts actually completed)
Japan

Japan

Yes, it is possible to enter into a fixed price construction contract. In fact, fixed price construction contracts are quite common in Japan.

Netherlands

Netherlands

Construction contracts are generally concluded on the basis of a fixed price agreed in advance. Certain items are often charged for as extras after the works have been completed. Furthermore, adjustments for additional work or a reduced amount of work can be made during the project. It is however possible to agree upon a fixed price, having the constructor bearing the financial risk. If at the time the contract is entered into no price or only a guide price has been agreed on, the client must pay a reasonable price.

Nigeria

Nigeria

The parties are free to agree on fixed price contract. Fixed price or lump sum contracts are commonly used in construction contracts in Nigeria. This allows for certainty in terms of costs of the building works. The major standard form of contracts utilized in Nigeria are predominantly fixed contracts.

Norway

Norway

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

  1. Instructed variations to the works
  2. Other events which, should they occur, and for which the contractor is not responsible, would cause it to incur loss and/or expense
  3. Fluctuations in the cost of materials and labour

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors mentioned above), the commercial reality is that both the employer and the building contractor normally want some flexibility built into the contract: the employer usually wants to have the right to instruct variations and the contractor certainly wants the right to claim for losses suffered and expenses incurred for which it is not to blame.

In essence, what parties usually mean when they talk about a 'fixed price contract' is a lump sum contract where the contractor's entitlement to additional money is limited, for example, there are no fluctuation provisions and/or the events which would usually entitle the contractor to compensation for loss and/or expense are restricted. Parties may often refer to a 'guaranteed maximum price' contract which, again, is unlikely ever to truly mean this – employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

Poland

Poland

It is possible to draft a construction contract where the price is fixed for given works. Often both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to make variations and the contractor will want the right to claim for losses suffered and expenses incurred for which it is not at fault.

In essence, what parties usually mean when they talk about a 'fixed price contract' is a lump sum contract where the contractor's entitlement to additional money is limited, for example there are no variation provisions and/or the events which would usually entitle the contractor to recompense for loss and/or expense are restricted.

Portugal

Portugal

Yes, it is possible for parties to enter into a fixed price contract. However, parties often agree on the terms and conditions which allow the fixed price to be revised in certain circumstances. The Civil Code (applicable to all private works contracts) allows the employer to change the scope of the works, provided that its changes do not exceed one fifth of the total amount of the works and the associated costs are paid to the contractor. In public works contracts, payment of the fixed price is the rule; it is only if permitted by law and in very strict circumstances that the contractor will see the construction price revised.

Romania

Romania

As a matter of practice, the parties to a construction agreement usually establish a contract price that is subject to adjustments calculated as a consequence of variations such as:

  • Changes to the quantities of any item of work included in the construction contract (although, such changes do not necessarily constitute a variation)
  • Changes to the quality or other characteristics of any item of work
  • Changes to the levels, positions and/or dimensions of any part of the works
  • The omission of any work unless it is to be carried out by others
  • Any additional work, materials or services necessary for the permanent works, including any associated tests to be carried out on completion, drilling of boreholes and other testing and exploratory work
  • Changes to the sequence or timing of the execution of the works

In addition, the construction contract may provide that the contract price may be adjusted in order to take into account any increase or decrease in costs resulting from a change in the country's laws or in the judicial or official governmental interpretation of such laws, which affect the contractor in the performance of its obligations under the contract.

The relevant legislation does not prohibit the parties from entering into a construction contract where the price to be paid to the contractor is fixed.

In addition, under the legislation governing public procurement, in public procurement contracts, the price may be adjusted only in specific situations and subject to conditions expressly provided for by the law.

Russia

Russia

Under Russian law the price of a construction contract can either be fixed (lump sum) or an estimate (eg actual costs plus an added percentage for profit). Even if the price is fixed the contractor may in certain circumstances demand an increase in the price, eg due to a significant change in the price of materials or if it is necessary to carry out additional works due to the client changing his instructions.

Slovak Republic

Slovak Republic

Contracts for work governed by the Civil Code can establish the price either determined as a fixed price (eg price on budget) or as a price determined by estimation. The fixed price can be expressed as a whole price or as a price of a specific unit of measurement. It cannot be increased without the consent of the client and any costs not included can only be invoiced upon a written approval of the client.

In accordance with the Commercial Code, it is at the discretion of the contractual parties whether to agree on a fixed price, or to stipulate another method for determining the price. However, if the parties agree amendments to the extent of the works, the price shall be adjusted accordingly. Furthermore, if the parties agree, after the conclusion of the contract, to amend the works without reflecting this change in the price, the client will be bound to pay a higher or lower price in relation to the amendment(s), whilst taking into account the difference in the extent of the necessary activities and the reasonable costs arising from the amendments to the work.

Spain

Spain

Depending on the how the construction contract is structured, it may be possible to provide for a fixed price which is not dependent on the final costs incurred by the contractor.

In such fixed price contracts, the only grounds for varying the price are variations to the works instructed by the developer (other factors, as fluctuations in the price of materials are absorbed by the contractor). Contracts in this form are usually more expensive.

Sweden

Sweden

The parties to a construction contract can agree that the price for the work shall be fixed. In addition to the fixed price, the contractor can charge the employer for works resulting from changes, amendments and/or variations to the agreed contract works. Such changes, amendments and/or variations do however generally need to be agreed upon in writing.

Thailand

Thailand

Yes. The parties are able to fix the price for the entire work whereby the price is stipulated in the construction contract. Consequently, the contractor will take the risk of increasing costs, including materials and labour. This usually occurs in regard to public procurement.

Alternatively, payment in a construction contract may be split into separate stages. This usually occurs in regard to private procurement.

United Arab Emirates - Abu Dhabi

United Arab Emirates - Abu Dhabi

There is no statutory prohibition in Abu Dhabi on entering into a fixed-price contract. Commercially, fixed-price contracts are often negotiated as well as the circumstances in which such fixed-price can change.

United Arab Emirates - Dubai

United Arab Emirates - Dubai

There is no statutory prohibition in Dubai on entering into a fixed-price contract. Commercially, fixed-price contracts are often negotiated as well as the circumstances in which such fixed-price can change. There are two main factors in a typical construction contract which provide for an alteration to the price. They are:

  1. Instructed variations to the works
  2. Other events which should they occur, and for which the contractor is not responsible (such as employer breach), would cause him to incur loss and/or expense

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy. In essence, what parties usually mean when they talk about a 'fixed price contract' is a lump sum contract where the contractor's entitlement to additional money is limited, for example there are no fluctuation provisions and/or the events which would usually entitle the contractor to recompense for loss and/or expense are restricted. Parties may often refer to a 'guaranteed maximum price' contract which, again, is unlikely ever to truly mean this - employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

UK - England and Wales UK - England and Wales

UK - England and Wales

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

  1. Instructed variations to the works
  2. Other events which should they occur, and for which the Contractor is not responsible, would cause him to incur loss and/or expense
  3. Fluctuations

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy. In essence, what parties usually mean when they talk about a ‘fixed price contract’ is a lump sum contract where the contractor’s entitlement to additional money is limited, for example there are no fluctuation provisions and/or the events which would usually entitle the Contractor to recompense for loss and/or expense are restricted. Parties may often refer to a ‘guaranteed maximum price’ contract which, again, is unlikely ever to truly mean this – employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

UK - Scotland

UK - Scotland

There are three main factors in a typical construction contract which provide for an alteration to the price. They are:

  1. Instructed variations to the works
  2. Other events for which the contractor is not responsible which, should they occur, would cause him to incur loss and/or expense
  3. Fluctuations in cost

Whilst it is theoretically possible to draft a construction contract where the price is fixed (by omitting the three factors just mentioned), the commercial reality is that both the employer and the building contractor will want to have some flexibility built into the contract; the employer will usually want to have the right to instruct variations and the contractor will certainly want the right to claim for losses suffered and expenses incurred for which it is not blameworthy. In essence, what parties usually mean when they talk about a 'fixed price contract' is a lump sum contract where the contractor's entitlement to additional money is limited, for example there are no fluctuation provisions and/or the events which would usually entitle the contractor to recompense for loss and/or expense are restricted. Parties may often refer to a 'guaranteed maximum price' contract which, again, is unlikely ever to truly mean this – employer changes and/or other possible occurrences will be excluded from the guaranteed maximum price figure.

Ukraine

Ukraine

Under Ukrainian law it is possible for parties to construction contracts to enter into a 'fixed price contract'. Ukrainian law provides for certain cases where the contractor is entitled to demand an increase in the price fixed in the contract (however, such demands are not automatically binding on the developer).

United States

United States

Yes, parties can enter into a ‘fixed price contract’, often referred to as a ‘lump sum’ or ‘stipulated sum’ contract, for performance and completion of the construction work. However, although the price is fixed, the lump sum amount might be increased for certain reasons, including additional work that the owner would like the contractor to perform, differing site conditions (see Limitation period), or force majeure (see Allocation of risk).

Additional work causing an increase to a lump sum contract likely would be performed pursuant to a ‘change order’, which is an amendment to the contract signed by both owner and contractor providing for the additional work. Change orders should describe the change in the work and state any change in compensation or time as a result of the changed work.

In a lump sum contract, the contractor generally takes the risk of increases in the cost of labour and materials, but also benefits in the event of any decrease. In such a case, fluctuations in price or the labour force will not change the lump sum amount.

Absent the ability to add to or reduce the scope of work (and thereby increase or decrease the lump sum amount), an owner would not be able to make any material change to the project after execution of the contract, which is often too rigid for most owners. Thus, fixed price contracts generally have some mechanism where compensation can be changed under certain circumstances.

Zimbabwe

Zimbabwe

The application of fixed price contracts is as agreed by the parties. Fixed price contracts are therefore possible and are common.