The vast majority of building contracts administered by Architects and Project Managers in Ontario are lump sum (stipulated price) contracts. This typical type of contract is used for measurable work involving standard construction procedures and work not easily broken down into definable units. With this type of contract, the owner assigns all of the risk to the contractor who in turn expects to be compensated for costs associated with any unforeseen circumstances that may arise.
A general contractor who enters into a lump sum contract with an owner normally subcontracts out specific portions of the work such as site grading and site servicing. This type of work is definable but quantities are not always determinable during the tender.
Extra construction costs are not uncommon for the site servicing and site grading components of a typical building project. Fluctuations in the water table, soil conditions, soil types, changes to the design, unconfirmed utility location and tendering prior to municipal approvals are only some of the factors that could lead to extra costs.
Traditionally, additional site work is completed on a time and material basis. The problem with this approach is that in the majority of cases, the work is completed unsupervised or the contractor’s proposed method and manpower needed to complete the work is questionable. This leaves the extra claims by the contractor open for interpretation and negotiation.
The inclusion of a schedule of rates for the site servicing and grading components within a lump sum contract eliminates the ambiguity that arises when extra work is required beyond what was originally tendered. It provides a tendered unit basis for items that are easily quantifiable in the field. It also provides a foundation for a more in-depth tender analysis, eliminates negotiations, reduces consultant involvement and provides a level of fairness to both the owner and the contractor.
For an example, as of July 1st, 2011, the Ministry of Environment’s changes to the Ontario regulation 153/04, regarding contaminated fill has increased the probability of an extra claim from the contractor. The reduction of acceptable levels of contamination found within the soils on a site increases the likelihood of offsite materials being required to be disposed of at a ministry approved landfill. The addition of a schedule of rates to a contract would provide a tendered unit price for the removal and disposal of the contaminated material offsite leaving only the quantity to be verified in the field.
While some contract administrators consider the addition of a schedule of rates to a lump sum contract a drawback as it reduces contractor’s risks, most understand that strongly worded clauses putting all the risk on the contractor for unforeseen circumstances would not be enforceable should a dispute lead to litigation.
For additional information on this topic, contact MGM directly.