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2.7 Fixed-Price Lump-Sum Contracts

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Sometimes, the Conditions of Contract proffered by the Employer for EPC Projects may contain the words ‘fixed-price’ as well as the term ‘lump-sum’; I have seen that this combination of words can hurt the Contractor. I say this, because I experienced a number of instances where the Employer's Team took the position that those additional words meant that the Contractor could not claim any additional money over and above the original Contract Price under any circumstances whatsoever. That position ignored the fact that there were many clauses in the Contract that mentioned the right of the Contractor to be reimbursed for extras arising from the Employer's side.

On one such occasion there happened to be (deliberately) no provisions included of any sort for Variations to be made, the reason being that the Employer's Team had made it clear that there was absolutely no contingency fund and no budget allowance for Variations to occur. The Contractor had understood that this meant that the Employer would not change a single thing from what had been agreed as the work scope incorporated in the Contract. However, it soon became clear that that was not how the Employer interpreted the Contract. The Employer's view had been that the Contractor should have included an allowance in the bid pricing for all the extras that the Employer would require, since the Contract Price was described as being fixed-price, lump-sum. This led to many arguments and several impasses, the majority of which were never satisfactorily resolved from the Contractor's perspective.

My advice to the Contractor regarding these unacceptable (and added risk) situations is twofold:

1 Never accept the words ‘fixed price’ in the Conditions of Contract, and most certainly not in conjunction with the phrase ‘lump-sum’.

2 Always insist that adequate clauses are added that will entitle the Contractor to reimbursement for Employer-directed Variations. This is especially so if the Employer is adamant that such clauses are missing because no Variations will be allowed (which should be regarded by the Contractor as a ‘red flag’ that major problems are sitting just over the horizon).

Practical Risk Management for EPC / Design-Build Projects

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