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?

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.