Claims Class – Case Studies

Contractor’s Entitlement to Increased Costs on a Fixed Price Contract

By Andy Hewitt
E: andy.hewitt@hewittconsultancy.com

Andy Hewitt is the Principal of Hewitt Construction Consultancy, a practice that specialises in
construction contracts and claims. He is also the Principal of Claims Class, an organisation that
provides education and training on construction claims. Andy is the author of Construction Claims
& Reponses and The FIDIC Contracts: Obligations of the Parties.

In Claims Class Case Studies, we present a case study of a real situation for the reader to study and
decide on the correct contractual outcome. The author’s opinion of the solution is presented
underneath.

The following describes the situation for this edition’s case study.

The Contract (in this case FIDIC 1999 for Building and Engineering Works Designed by the
Employer), as amended by the Particular Conditions, is a fixed price lump sum to provide the
works described on the drawings and in the specification. Sub-Clause 13.8 (Adjustments for
Changes in Costs) provides that there will be no adjustments to the Contract Price for changes in
the cost of labour plant or material and that the Contract rates and prices shall remain fixed.

The contract period was 24 months and the majority of concreting was carried out in the first six
months. In month 19however, the Contractor was issued a Variation instruction that caused him
to undertake substantial additional concreting works during months 20 to 22. At this time, the
price of ready-mixed concrete had increased by 15% over the average price during months 1 to 6.

Is the Contractor entitled to be paid the additional 15% on the cost of the concrete for the work
included in the Variation?

Claims Class Case Studies – Author’s Opinion

On the face of it, the fact that the Contract Price is fixed and not subject to adjustment for changes
in prices of materials, places the risk of price increases fairly and squarely on the shoulders of the
Contractor. If we look at the Contract a little more deeply however, we may see that the Contract
is a fixed price lump sum to provide the works described on the drawings and in the specification.
The Variation is obviously not part of the works described on the drawings or in the specification
and therefore, does not fall under this provision.

If we look at the Variation provisions, we see that Sub-Clause 13.3 (Variation Procedure) provides
that ‘Each Variation shall be evaluated in accordance with Clause 12 [Measurement and Evaluation],
unless the Engineer instructs or approves otherwise in accordance with this Clause’ and that Sub-
Clause 12.3 (Evaluation) provides that:

‘For each item of work, the appropriate rate or price for the item shall be the rate or
price specified for such item in the Contract ... However, a new rate or price shall be appropriate
for an item of work if …

‘(b) (i) the work is instructed under Clause 13 [Variations and Adjustments]…

‘(iii) no specified rate or price is appropriate because the item of work is not of similar character,
or is not executed under similar conditions, as any item in the Contract.’

In my opinion, it would be equitable to apply the above two provisions to the situation in question
because sub-section (b)(i) allows the Engineer to evaluate variations at new rates or prices if
appropriate. The situation that makes this an appropriate action to take, is that the new
concreting work was not executed under similar conditions with regard to the prevailing market
prices or the timing of the concrete work included in the Contract. Whilst the Contractor would
have to bear the risk for increased prices for the work included in the Contract and carried out at
the time originally envisaged, it cannot be fair or reasonable to expect him to bear price increase
which had occurred some 15 months later. Additionally, had the Employer chosen to execute the
variation work though a separate contract, then the Employer would certainly have had to pay the
current market rate. The evaluation of the concreting rates for the Variation should therefore
include for the increased cost of concrete.