Pricing Construction Contracts

• Author: Stephen A. Hess
• Pages: 219-245

Prici ng Co nstr uctio n Con 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.

9

Pricing Construction

Contracts

STE PHEN A. HE SS

C H A P T E R

219

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).