By Steve Rizer
The pricing mechanism used in construction agreements “very often” may be dictated by the level of design that has been achieved, Sherman & Howard LLC attorney Stephen Hess told a group of professionals attending a webinar that WPL Publishing held last week. This is one of the points he made in summing up his presentation, entitled “Construction Contract Pricing Clauses: Shifting Risk and Managing Scope Disputes.”
“If the level of design is 100 percent, a stipulated-sum contract may make sense if you’re a contractor,” Hess told a target audience of architects, engineers, construction managers, contractors, subcontractors, consultants, public and private owners, and construction law attorneys. “If only 80 percent of the design has been achieved, then a stipulated-sum contract might be foolhardy because you don’t know exactly what it is that you’re promising to build.”
In his concluding remarks, Hess stressed to webinar attendees that “the single biggest thing you should take away from this [presentation] is that a lot of disputes can be understood by focusing on whose risks are at stake with regard to different pricing mechanisms.”
Hess explained that in cost-plus contracts, the owner bears all of the risk of changes in scope. Also in cost-plus contracts, the owner bears all of the risk -- as well as the benefit -- when it comes to changes in pricing. “If you are an owner that wants to get the cheapest price possible, then you ordinarily use cost-plus with certainty about how prices are going to go. If, on the other hand, you value certainty as to cost, and you don’t want to take the risk of price going up and down, then you’d ordinarily enter into a stipulated-sum contract.” In stipulated-sum contracts, a contractor bears the entire burden of changes in price, but an owner bears the full burden of changes in scope.
Hess then said, “And so, when people ask, ‘Well, when is the last time you had a fight over scope in a cost-plus contract?’, [I tell them,] ‘I can’t remember, except [in] one case that involved very substantial delay damages.’ On the other hand, there are all kinds of fights over scope in stipulated-sum contracts.”
Hess emphasized to webinar attendees that “once you understand how pricing mechanisms and risk allocation and disputes all go hand in hand, you should start being able to see and start planning for the particular pricing mechanisms that are appropriate for the sort of contract that you’re working with.”
For his presentation, Hess divided the discussion into the following sections: basic pricing mechanisms for construction; budgeting, bidding, and pricing mechanisms; specific price-related contract terms; “pricing mechanism” and other contract terms; and the question-and-answer segment.
The ConstructionPro Network member version of this article includes a transcript of the "budgets and lenders" segment of the webinar. To sign up for a membership, click here.
To purchase a recording of the 90-minute webinar, visit http://constructionpronet.com/Products/Construction-Contract-Pricing-Terms.aspx.