Assessment of Varied Work in Lump Sum Contracts

Despite the effort made during the design development phase, the variations during the
construction stage are common in the construction industry. Though, at the early stage of the
project, the professional consultants spend a vast amount of time exploring the client’s
requirements and develop the design to meet the desired functional benefits, variation is a usual
thing during the execution. The main reasons for variations are the change in the client’s
requirements and complicated nature of the construction projects.

So, in the case of variations, the contract parties are required to assess the value of the varied
works and to adjust the contract value accordingly. The assessment is much straightforward in
case of the remeasurement contract than the lump sum contract, as in the remeasurement
contract, the contractor is paid based on the works executed at site eventually. However, in the
case of omission of the scope of work, the loss of profit to be taken into account for both
remeasurement and lump-sum contracts. Also, the adjustment of unit rates may need to be
considered in case the varied work is significant.

Assessment of a varied work if the BOQ quantity is wrong

For ease of discussion, the following example has been considered and identified 4 possible
assessment options.

Scenario:

The original contract scope includes the HDPE pipework. However, the Employer decided to
change it to DI pipe and issued variation instruction through the Engineer in accordance with the
variation protocol. The quantity of the HDPE pipework shown in the drawing (which is actually
required for completion of the scope agreed under the contract) differs from the quantity given in
the BOQ. For the sake of discussion, assume the correct quantity as per the drawings is 150 m,
and the quantity mentioned in the BOQ is 100 m. Now, the question is how to assess the cost
impact with respect to the change in the material specification. For the sake of discussion,
consider the cost of installation remains the same in both cases.

Option 1

o Omit the amount calculated by multiplying the BOQ quantity by BOQ rate
o Add the amount calculated by multiplying the BOQ quantity by new rate

Option 2

o Omit the amount calculated by multiplying the BOQ quantity by BOQ rate

o Add the amount calculated by multiplying the actual quantity by new rate

Option 3

o Omit the amount calculated by multiplying the actual quantity by BOQ rate

o Add the amount calculated by multiplying the actual quantities by new rate

Option 4

o Omit the amount calculated by multiplying the actual quantity by BOQ rate

o Add the amount calculated by multiplying the BOQ quantity by new rate
Confusing??? Don’t worry. The human brain has the ability to easily understand the tabulated
texts than lengthy typescripts.

Understanding the concept of lump sum contract is essential to determine the right valuation
mechanism.

Remeasurement Vs. Lump Sum

1. In remeasurement contracts, the parties are bound with unit rates of the BOQ, not with the
total contract price. The given contract price, at the time of contract formation, is just an
approximate figure. The contract price shall be adjusted as per the actual work performed
eventually.
2. In lump sum contracts, the parties are bound with the contract price - the contractor is
obligated to complete the entire scope of work identified in drawings and specifications within
the agreed contract price. In other words, in the lump sum contract, the Quantity Risk is with the
contractor.

3. But in remeasurement contract, the Quantity Risk is with the employer - we need to certify
the quantity as per drawing/work done even the BOQ shows a lesser quantity. The contractor
deserves the right to get paid for the items which are shown (expressively identified) in the
drawings, but not measured as the separate items, or related costs are not covered under any of
the BOQ items (simply a measurement error).

Note: However, a miscellaneous item which is to be included within an another item

shall NOT be paid separately. The coverage rules of Method of Measurement and
Pricing Preambles need to be consulted.

Well, from the above discussion, it is clear that quantity correction is not permitted in the lump
sum contract unless otherwise, any variations works occurred. And also, the contractor is entitled
to payment for missing items under the remeasurement contract only - not under a lump sum
contract.

Now the question is, out of 4 options, what is the correct method to value the varied works in the
lump sum contract.

What does the contractor bid for in the lump sum contract?
As the quantity risk rests with the contractor in lump sum contract, he must price for the scope
included in the contract i.e., as specified in the specification and drawings irrespective of
accurateness of the BOQ. The BOQ is just a guideline for progress payments.

In practice, if the quantities given in the BOQ is wrong, the contractor adjusts his rates to cover
the cost. In the above-given example, the contractor should have increased his unit rate by 1.5
times as the quantity mentioned in the BOQ is 1.5 lesser than the actual quantity required to
complete the scope.

So, in a lump sum contract, it is considered that the contractor has adequately priced to complete
the entire scope of works irrespective of items and the quantities mentioned in the BOQ.

Option Analysis

Option 3 & 4 - Omit the amount calculated by multiplying the actual quantity by BOQ rate
See the below calculation. Assume, the contractor’s actual unit rate to complete 1 m of HDPE
pipework is 10.
Since it is deemed that the BOQ rates have already been adjusted to mitigate the quantity errors,
the BOQ quantities should be considered for the omission – not the actual quantity.

Therefore, Options 3 and 4 are inappropriate.

Options 1 & 2 - Omit the amount calculated by multiplying the BOQ quantity by BOQ rate
As shown in the above calculation, the amount calculated by multiplying the BOQ quantity by
BOQ rate to be omitted. (Option 1 & 2 satisfy this condition).

For the addition part, if the new rate (rate for DI pipe) is calculated using the actual market rate,
such rate must be multiplied by the actual quantity. Because rate adjustment to mitigate the loss
due to quantity errors is not done yet. Therefore, Option 2 - “adding the amount calculated by
multiplying the actual quantity by new rate” is the most appropriate method.

Assume, new actual rate is 12 for supply and installation of DI pipe and see the below
calculation for further explanation.
What if the items for HDPE pipework are completely missing in BOQ
but included in the scope of work?
Though the items for HDPE pipework are entirely missing in BOQ, it is deemed that the
contractor has included the cost of HDPE pipework somewhere else in his offer, based on the
concept that the contractor must price for completion of entire scope regardless of the accuracy
of the BOQ.

Therefore, an appropriate deduction shall be made from the contract value against the HDPE
pipework before adding the value of DI pipework. The deduction amount shall be calculated
using the actual quantities and the actual rate of HDPE pipework. In such a scenario, as the rate
is not available in the BOQ, the parties must establish new rates using the actual facts.

The contractor may raise his concern that he didn’t include the cost of HDPE pipework
anywhere in the contract. Such a statement might be true or untruth. The contractor’s position in
each situation, like what if he priced and what if he did not price for HDPE pipework in the
original BOQ, needs to be analyzed. If the contractor failed to price for the original scope, he
would have incurred cost for the execution of HDPE work even if the Employer had not
implemented any changes. Therefore, whether the contract sum includes the cost of HDPE
pipework or not, an appropriate deduction shall be made from the contract sum against the
HDPE pipework before adding the value of DI pipework.

What will happen if an item exists in the BOQ but not included in the
scope and, therefore, not executed by the contractor at all?
In lump sum contracts, it is considered that the contractor priced for scope insisted in the
drawings and specification, but not merely based on the BOQ. Further, based on the principle
that, in the lump sum contract, the parties are bound with the contract price, the contractor
deserves the right for payment for BOQ items, which are not included in the scope.
However, if such an item is too irrelevant to the project scope, the contractor’s position to get
paid for such items is weak. The burden of proof rests with the contractor. He must prove that the
amount of such irrelevant item is to cover the cost of some other items executed at site. If the
court found that the amount mentioned against the ‘not executed’ item is purely a profit for
contractor because of the employer’s mistake, then the contractor’s position is difficult to
succeed in such case.

Error in multiplying the quantity by the rate in the contract BOQ

Generally, parties correct the multiplication errors during the tender evaluation stage through the
post-tender clarification and amend the contract sum accordingly. In case such correction is not
done, how to deal with calculations if such an erred item undergone a variation? Since such
wrong figure available in the Amount column forms the contract sum, the same incorrect amount
to be considered for calculation of any variations. If no variation, GENERALLY, the contractor
will get paid for the incorrect amount.

Now the question is that if the contractor purposely placed a higher figure in the amount column
(which is not the multiplication of the quantity by the rate), can the contractor get paid for such
an exaggerated amount?

On the other hand, if the contractor really made a careless mistake and therefore the amount
mentioned in his offer is far lesser than the correct figure, can the employer enjoy the benefit
because of the contractor’s real mistake. The general principle is that a party cannot get benefit
merely from the mistake of other parties and so the court may ask the party to compensate
reasonably. However, the employer may raise his argument that he would have gone for another
bidder had this particular contractor not made a mistake in calculation and ended up with a high
contract price (offer). So, the employer’s decision on the selection of a suitable contractor in both
cases needs to be analyzed like 1. what if this particular contractor did not make a mistake in
calculation and submitted a higher offer and 2. what if this particular contractor submitted a
lower offer (than the intended one) because of calculation error. The employer may raise his
concern that he would have gone for another contractor if this current contractor had not made a
mistake in calculation and, therefore, had submitted a higher offer. Also, there is a possible
argument that the contractor might have deliberately submitted a lower offer in order to increase
the chances of securing the contract. Therefore, the contractor’s argument to get reimbursed for
error is easily vulnerable.

In view of the above discussion, you understand that the answers to these issues are not
straightforward. The party who put forward its argument in strong and discharge the burden of
proofs wins.