Project managment

Principles of pricing and payment

In the simplest contracts for construction, the amount to be paid to the contractor may have been pre-agreed as a lump sum, or a series of lump sums relating to different items to be provided, and payment will depend on these being completed. In principle many turnkey types of contract and some design and construct contracts follow similar arrangements although, in practice, things seldom turn out so simple.
For many construction contracts, however, the works cannot be precisely defined at the time when the contract for construction is entered into, such as the depth to which foundations should be taken or pipelines and sewers laid.
Also there may be additions or alterations found necessary when conditions on site are not those expected. In such circumstances a re-measurement type of contract may be the most suitable. Such a contract must set out exactly what is to be measured for payment purposes and when the payments are to be made.
Hence it also needs to show, either specifically or by implication, what work is included in the prices to be paid.
Under most standard forms of contract the contractor undertakes to carry out the works described in the specification and shown on a set of drawings included in the contract. This obligation of the contractor is one which he takes on independently of the terms set out in the contract as to how and what he will be paid for various items of work. When a bill of quantities is used for the basis of payment, the specification and drawings describe what is required in detail, and the tenderer has to consult these when he prices a bill item and take them into account. He has also to see from the rest of the contract what are the obligations he must cover when he enters a price against a bill item.
The bill of quantities is, of course, of importance in the tendering process because it allows a reasonably fair financial comparison of tenders, but it does not limit what is to be built, nor limit the contractor’s obligations. Under the ICE and similar conditions the bill of quantities is merely used for the ultimate  task of pricing the works actually constructed. What is to be built will depend on the drawings, specifications and instructions issued by the engineer which the contractor is bound to follow. What is to be measured as a basis of payment is fixed by the method of measurement set out in the contract.


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