- Controversies Relating to Lump Sum Priced Items in Construction Contract
- September 17, 2012
- Law Firm: Lee Tsai Partners Attorneys-at-Law - Taipei Office
In construction practices, there are so-called lump sum priced items, which are special work items whose prices can hardly be estimated before a contract is executed due to the inability to determine their quantity or scope in advance. As a result, the parties to the contract agree to price such items by a certain amount or a certain percentage of the contractual price based on past experience. In addition, since such work items are usually denominated by “set," they are referred to as lump sum priced items.
Lump sum priced items are defined under Article 1.2.1 of Chapter 01271 entitled “Quantification and Pricing” of the Framework Regulations Governing the Construction of Public Projects promulgated by the Executive Yuan. Under such Framework Regulations, “such construction items include independent work of different categories, and, for the ease of quantification, pricing, cost control and construction management, are combined as one single work item; and although such independent work items can be separately listed and quantified in contracts or documents, they are nevertheless paid as a stand-alone payment item at the time of payment.” It is stressed in such definition that although it is possible to list the detailed sub-items (or even their quantities) of a lump sum priced item, such item shall be treated as one item at the time of payment.
In practice, tax, profit and management fee items are usually estimated and listed as lump sum priced items. However, in the event of any contractual change such as any addition or reduction of the contract price, it calls into question if such lump sum priced items are adjusted in proportion to the changed contract price. Article 32 of the Guidelines for Procurement Contracts promulgated by the Public Construction Commission, which recommends adjustment based on the ratio of the settled amount to the original contractual amount, may be referenced.
In addition, construction contracts can be roughly categorized into lump sum contracts and unit price contracts based on the different manners in which the contract price of a construction project is determined. The total price of a lump sum contract is determined when the contract is executed and does not change in principle due to differences between the quantity of actual work and the contract, while the contract price of a unit price contract has to be calculated based on the actual quantity of work done by the contractor and the settled amount so calculated should be the actual contract price. Since the settled amount for a unit price contract is usually not equal to the amount estimated when the contract is executed, this may in practice also bring up the question if the amount of a lump sum priced item should be increased or decreased by the same ratio.
With respect to such issue, the Supreme Court rendered the 100-Tai-Shang-1015 Decision, holding that “for the convenience of quantification and pricing, cost control and construction management for project items, which include stand-alone work of different categories, there is so-called ‘lump sum priced items’ in construction practices, which means that although the agreed-upon amount shall be paid in principle regardless of the quantity of work involved for such project items, it is not true that the parties shall not request adjustment to the amount based on any increase or decrease of the actual amount of work or any acceleration or delay of construction completion if the parties have agreed under the contract to other pricing manners or if the lump sum price of project items is agreed by the parties only out of expedience.
In addition, the Supreme Court rendered the 101-Tai-Shang-729 Decision, holding that “although the agreed-upon amount shall be paid in case of lump sum pricing in construction practices regardless of the actual quantity of work involved in project items, still if such lump sum pricing is agreed by the parties out of expedience based on the nature of project items, it is not true, for the sake of fairness, that the parties cannot request adjustment based on the increase or decrease of the actual quantity of work.”
Based on the gist of the said Supreme Court decisions, the Supreme Court holds that the issue of “whether lump sum priced items should be adjusted by the same ratio if the monetary amount for actually completed work under a unit price construction contract differs from the contract price when the contract is executed” should be addressed by exploring the true intention of the parties agreeing to the amount of a lump sum priced item when the contract provisions are not clear. There are three potential scenarios as follows.
(1) If the parties intend for the lump sum pricing amount to be fixed no matter what happens, the original amount of the lump sum priced item shall be paid even if the settled amount is higher than the contract price determined when the contract is executed.
(2) If the parties have agreed to the manners in which the amount of a lump sum priced item is calculated (e.g., if it is illustrated that such calculation should be based on a certain percentage to the contract price), once the contract price is changed after the settlement of the actual quantity of work completed, the lump sum pricing amount shall certainly be changed accordingly based on such illustration.
(3) If it can be inferred by the contractual arrangements that the lump sum pricing amounts as listed are for reference only, such lump sum pricing amounts shall be calculated based on the ratio of the settled amounts to the original contract prices.
In addition to the issue of whether the amount of a lump sum priced item should be changed as a result of the above-mentioned contractual changes and differences in actual quantities of work completed, similar issues may arise from construction delay.
The Taiwan High Court rendered the 100-Jien-Shang-53 Decision, holding that a specific lump sum priced item includes construction site management fees, labor safety and sanitation fees, environmental protective measures fees, quality management fees, etc., which are calculated based on the construction period and the work set forth in the original contract and do not include the management fees for the extended construction period. The contractor is obviously still required to pay the above-mentioned fees during the extension of the construction period and thus incurs damage. Therefore, the contractor’s assertion that the damages shall be calculated based on the ratio of the original construction period to the extended construction period should be acceptable.
However, it should be noted that the court’s admittance that lump sum priced items may be adjusted based on the ratio of construction extension does not apply to all cases and is still limited to time-related lump sum priced items. For example, when the Taiwan High Court weighed the contractor’s claims for additional miscellaneous costs incurred by the extension of the construction period in the 100-Jien-Shang-1 Decision, such claim asserted by the contractor was rejected by the Taiwan High Court on the ground that the contract in question is set-based pricing and the contractor cannot substantiate the circumstances of actual cost defrayment and certain causal relationship between such costs and the extended construction period.