What Are You Quoting: Lump Sum or Schedule of Rates? 4

Monday, April 27th, 2015
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Too often I see contractors get themselves muddled on the type of contract they have.

This has implications should a payment dispute arise. The first obstacle is the argument over what kind of contract applies. This is crucial because it has a direct impact on what both parties see as the scope of work.

Here’s how the trouble starts: assume a client wants a contractor to waterproof areas of a new building and offers plans from which to price. Assume the subcontractor calculates the area to be waterproofed is 450 square metres. He offers a rate of $40 per square metre which also produces a price of $18,000. The quote may state 450 square metres x $40 = $18,000.

Now what is being offered here: A lump sum price of $18,000, or an agreement to apply a rate of $40 per square metre?

There are compelling arguments for both views and my point here is that the subcontractor needs to be very precise in how the offer is made. If the client understands this to be a lump sum offer, then the client will expect the entire area to be waterproofed for that price, on the basis that the subcontractor priced of provided plans and offered a lump sum of $18,000.

This means that so long as that is the area completed, there is no variation in cost. But the subcontractor will be under the impression that this is a schedule of rates contract and will carry out a site measure or ‘take off’ in order to quantify the exact are completed, not off the plan but ‘actual’ areas completed. Assume that the take-off shows that the areas completed is 513 square metres. The subcontractor then invoices for an additional 63 square metres at $40 each, or an extra $2,520.

And here is where the dispute arises: One party thinks the deal is “$18,000” the other thinks it’s “$40 per square metre.”

In my experience, this would be regarded as a schedule of rates contract as the rate is explicitly referred to in the quote and applied to the area as one can ascertain from the plans. Furthermore, the unit of measure (a square metre) is only realisable on the ground, not from a plan. All too often plans do not properly represent the actual areas once the structure is built. On the other hand, the client may validly argue that the manner in which the subcontractor set out its offer is irrelevant: a price of $18,000 was the bottom line offer that was accepted.

Of course the way out here is for the subcontractor to either quote $18,000 based on the plans, or simply leave it at $40 per square metre. That is, provide one or the other; rather than an ambiguous combination of both.

These issues arise often when a subcontractor prices off a bill of quantities (BoQ) as part of the tender documents but when the offer is accepted, the BoQ is not made part of the contract and instead a lump sum price is all that is included in the contract. If the quantities change, then the subcontractor is left arguing about the BoQ; which the client will reject because “it is not a contract document.”

The other thing to consider is the effect this kind of argument has on variations. It creates disputes on two fronts:

1) Is there in fact a valid variation, and

2) if there is a variation, what is it worth? From the client’s point of view, unless the drawings have changed there is no variation or additional work. The client will argue that the plan the subject of the quote has not changed and therefore neither should the price. The subcontractor will argue that the plan is not relevant, only the actual dimensions of the work carried out, and if that shows more than 450 square metres then there is a variation for extra work.

Even if the parties agree that there is a variation, the subcontractor will assume it will be valued at $40 per metre ‘as quoted’ but the client will not automatically accept this rate ‘as quoted.’ The client only accepts the lump sum and takes the view that extra work is to be valued as agreed or as per a separate quote.

As is obvious, this initial misunderstanding can cause a trail of disputes and needs to be sorted at the outset. To all those trades that quote using a rate, you MUST be clear in your offer to the client. Either offer a lump sum without any reference to a rate, OR offer a rate(s).

Never put both in the one quote. It’s the start of a long problem.

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  1. Sam

    Just another reason NOT to sign up on a quote. There should be a contract and, if I had anything to do with it, it would not mention the quote and would make it very clear that the contract was a lump sum contract. The entire industry operates off drawings and the idea that the job can only be costed when it is finished and can be measured is BS!

  2. peer afridi

    A party to a construction contract is stuck with a rate or price whether the contract price is expressed as a lump sum or subject to recalculation after re measurement using the contract rates and prices which are constituent elements of the contract price or tender sum. Operating OFF drawings by either partyis contravention of contract and would thus result in disputes, calling for negotiated settlements.

  3. Tony Fendt

    So the contractor has no obligation to visit the site and ascertain for himself the extent of work and the risks … as a competent and reasonable contractor should do? The plan is merely a depiction of the extent of the work, not a complete scope of work. If dimension are shown on the plan and differ significantly from the measurements in situ then there may be a case. That is why most building tender documents instruct the contractor to visit the site and ascertain the extent of work and risks; if he is unable to render a proper tender then the price should be accordingly conditioned to communicate the uncertainties.

    • Sam

      You wanta try "visiting the site and ascertaining… the extent of the work…." on a Greenfield or Brownfield site that hasn't been built yet? i.e., about 90% of the work in this industry? When do you people think work is tendered and priced in this industry? Just before you do it?