No Increases Allowed

The term guaranteed maximum price when applied to a construction contract provides for the employer a nice feeling of security. He of she when entering into a contract of this nature is convinced that no matter what happens the final cost will not be above the maximum and there is a fair chance it could be lower. Any design changes which results from the specific instructions of the employer would understandably fall outside the guaranteed price. Guaranteed maximum price contracts have been with us for many years. IDC a Stratford on Avon construction company who pioneered design and construct contracts some twenty five or thirty years ago promoted their contracts as guaranteed maximum price. It is a good selling point which can be persuasive.

With risk transfer being at the moment very much in vogue the guaranteed maximum price contract has seen a resurgence. The intention of this procurement route is to transfer all risks to the contractor and allow for no increases in price whatsoever other than costs which result from employer changes. Construction is unlike most other commercial processes such as the motor car industry where a prototype is built and when perfected mass produced on an assembly line. Each construction project is a one off and unique. The designer has to get it right first time and the manufacture and onsite process allows for no serious errors.

The contractor who undertakes a guaranteed maximum price contract has to take these risks together with risks such as unforeseen ground conditions, unexpected encounter with service mains, bad weather, industrial unrest, shortages of labour plant and materials, changes in legislation, insolvency of suppliers and subcontractors, fire storm and earthquake. Contractors are even asked to check all information received from the employer and take responsibility for its accuracy. It is hardly surprising that when one or more of these risks becomes a reality and substantial additional costs are incurred the contractor casts round to find good legal reasons for receiving payment above the maximum price.

Claims for More Rejected
The recent case of Mowlem v Newton Street Limited (2003) illustrates the difficulties which can befall a contractor who enters into a guaranteed maximum price contract. Work involved the conversion of a post office built of reinforced concrete in 1910 in Manchester, into 104 apartments, an underground car park with commercial units at ground level. The contract was an amended standard form. Article 10 expressly stated that the parties agreed that the contract sum was a guaranteed maximum price and that the contractor acknowledged he had taken all risks and responsibilities.

Under a heading of contractors risk the contractor also became responsible for any incorrect or insufficient information given to him by any person whether or not in the employment of the employer. This represented a high level of risk in view of the fact that the work involved the conversion of a building which is almost 100 years old.
Difficulties arose as a result of the issue by the Employers Agent of an instruction for the contractor to carry out concrete repairs to the existing structure. It was argued on behalf of Mowlem that as there was no specific reference in the Employers Requirement or the Contractor Proposals to the concrete repairs they were entitled to be paid for the work over and above the guaranteed price.

The lawyers representing Newton Street Limited were of the opinion that Article 10 which placed all risks onto Mowlem deprived them of any right to additional payment. It was the view of the judge in finding against Mowlem that within the scheme of the guaranteed maximum price there is nothing to displace the ordinary and unambiguous meaning of Article 10 that the risk of unforeseen defects in the existing building was the contractors.

Read the Fine Print

The question needs to be asked as to whether it was reasonable and sensible for a contract for the conversion of an old post office to be let on a guaranteed maximum price basis. There was no knowing what the contractor might have encountered. The existing structures and foundations despite a proper precontract survey may have proved to be insufficiently robust to carry the load and require strengthening. Asbestos may have been discovered which could have resulted in a substantial cost to remove. Commercial organisations who purchase old property cannot sensibly expect to transfer all the risk of the suitability of the property for conversion onto the contractor. In attempting to price the risk in a sensible manner the contractor is likely to end up taking a gamble. When an unpriced risk becomes a reality the contractor rather like Mowlem will inevitably read the fine print to see if there is a get out. Some types of contract more easily lend themselves to be let on a maximum price basis where for example the contractor is able to properly assess at tender stage the full extent of the work necessary to meet the employer’s requirements. Commercial and residential premises on greenfield sites are good examples but due to government policy are likely to be not too plentiful.

No standard forms of contract as guaranteed maximum price
There are no standard forms of contract which are classified as guaranteed maximum price. The one which comes the nearest is the FIDIC Silver Book for use on international projects and although not titled a guaranteed maximum price contract this is its obvious intention. Employers on domestic projects who require a guaranteed maximum price are left with either amending an existing standard form or having a bespoke contract produced. Contractors who market themselves on the basis of guaranteed maximum price usually produce their own form of contract. In view of the problems encountered by Mowlem it is hardly surprising that despite the title contractors will usually include somewhere in the fine print reasons for increasing the price. A contract, which includes reference to a guaranteed maximum price, therefore isn’t always what it appears to be.

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