Pricing Construction Contracts

• Author: Carol J. Patterson - Ross J. Altman - Stephen A. Hess - Allen Overcash
• Pages: 255-282

CHAPTER

255

9

9.01 IntroductIon

This chapter discusses the various pricing mechanisms that owners and con-

tractors use to x the contract price through which a contractor’s compensa-

tion is determined for performing the work required of the contractor under a

prime contract.1

Little recitation of case law exists related to this discussion. When the con-

tract price is established by agreement between the parties, interpretation of

the contract is governed by the fundamental rules of interpretation that govern

all contracts; with few exceptions, those rules apply with equal force and, in

many cases, were developed with reference to construction agreements. Instead,

this chapter focuses its attention on the typical terms that parties employ in

pricing the work to be performed.

1. The discussion in this chapter is equally applicable to pricing contracts between general

contractors and subcontractors, but the discussion focuses on the owner and contractor for the

sake of simplicity.

Pricing Construction

Contracts

STEPHEN A. HESS

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CONSTruCTiON LAW

256

The pricing of construction contracts goes far beyond xing the compensa-

tion for which a contractor is willing to perform work and the owner is willing

to pay for such work. Instead, the specic mechanism that the parties choose

has an important role in allocating the economic risks between the owner and

the contractor. In addition, many contract clauses vary depending on the type

of pricing that is used.

Accordingly, the immediate goal of this chapter is to describe the different

pricing mechanisms used by parties to construction contracts. At the same time,

and as important, this chapter endeavors to explain the extent to which the

selection of a particular pricing mechanism inherently allocates risk between the

parties and the manner in which parties mitigate such risks within the agree-

ment itself or in their other commercial relationships. In addition, this chapter

identies and discusses numerous contract terms affected by the selection of the

pricing mechanism. In completing this chapter, you should devote as much time

to thinking about how the various contract terms are integrated into a cohesive

unit as you think about the purpose and meaning of individual terms.

9.02 gEnERAL PRICIng MECHAnISMS

FORCOnSTRuCTIOnCOnTRACTS

In the nal analysis, pricing mechanisms can be divided into two types: those

that x the price of the work at a stipulated sum (xed-cost) and those that

allow the price to vary depending on the cost incurred by the contractor. This

section discusses stipulated-sum contracts in some detail and then turns to an

overview of the important considerations related to cost-plus contracts. The

section continues by reviewing the manner in which these two basic types of

pricing may be combined into one contract and summarizes other variations

on these pricing schemes.

A. Stipulated-Sum Contracts

The simplest form of pricing is the stipulated-sum contract under which the

contractor agrees to perform all of the work for a xed gure. A typical con-

tract provision reads:

The Owner shall pay the Contractor the Contract Sum in current funds for the

Contractor’s performance of the Contract. The Contract Sum shall be Four Mil-

lion Five Hundred Thousand and 00/100 Dollars ($4,500,000.00), subject to

additions and deductions as provided in the Contract Documents.2

2. This clause is taken from AIA Document A101–2017, Standard Form of Agreement between

Owner and Contractor Where the Basis of Payment Is a Stipulated Sum §4.1 (2017).

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