Pricing Construction Contracts

Prici ngCo nstr uctio nCon tract s 219
9.0 int rodu cti on
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
There is little recitation of case law related to this discussion. When the
contract price is established by agreement between the parties, interpretation
of the contract is governed by the fundamental rules of interpretation that gov-
ern all contracts, and with few exceptions those rules apply with equal force
(and in many cases, were developed with reference) to construction agreements.
Instead, this chapter will focus 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
220 CO N S T RU C T I O N L A W
The pricing of construction contracts goes far beyond xing the compensation
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 that are used by parties to construction contracts. At the
same time, and as important, this chapter will endeavor 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 agreement itself or in their other commercial relationships. In addition, this
chapter will identify and discuss numerous contract terms that are 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 Ge neral Pricin G M ech anis Ms
for constru ction contrac ts
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. Stipula ted-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 A101–2007, Standard Form of Agreement Between
Owner and Contractor Where the Basis of Payment Is a Stipulated Sum § 4.3 (2007).

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