CPCCBC4003A: Bob Considers Using A Fixed Price/Lump Sum Contract: Select And Prepare A Construction Contract Case Study, FU, Australia

Bob considers using a fixed price/lump sum contract, however; he struggles to make an accurate cost estimation for the renovation work because of the various uncertainties regarding the project. Therefore, to minimize his own risk, he quotes an inflated price for the job at $120,000.

The quote is well out of James’ budget, however; since he is eager to begin renovation as soon as possible, the two parties settle on using a cost-plus contract. Bob checks the Victorian legislation to ensure that the use of a cost-plus contract is appropriate in the circumstances. He explains to James that this type of contract will better fit their needs as the cost for a substantial amount of the work cannot be calculated without first beginning the project.

To prepare the cost-plus contract Bob knows he must provide James with a fair and reasonable estimate of the total cost amount likely to be reached for the contracted work. Bob consults a quantity surveyor who specializes in cost planning and analysis. After reviewing the drawings and specifications, the quantity surveyor provides an estimate of the costs of the project. With this advice, Bob quotes what he sees as a fair and reasonable price of $75,000 for the project, which is written into the contract.

James, who is a little unsure, decides to consult a specialist construction and planning lawyer for advice on the suitability of the proposed cost-plus contract for the project. The lawyer advises that this contract type would mean that James, as the owner, would bear a significant financial risk because of cost uncertainty and therefore he would need to be vigilant in ensuring that invoices are provided by the builder as proof of work completed and materials used.

Finally, the lawyer recommends that James proposes the use of a warranted/guaranteed maximum price contract, with the addition of a GMP (guaranteed maximum price) to the current contract. This would give James some security by capping the cost at a certain amount, therefore reducing his financial risk.