An ICCP member recently asked my opinion on how an adjustment to the Tender Price agreed upon during tender negotiations should be applied when pricing variations. This is a matter that often causes contention so I thought it would make a worthwhile blog subject.
The following is a typical scenario:
- The Contractor submits a tender accompanied by a priced bill of quantities for the tender price.
- The Employer meets with the Contractor and negotiates a reduction, and the contract sum is agreed at a lesser figure than the tender price.
- The contract documents are prepared and include a bill of quantities which shows the final price in the bill of quantities agree with the contract sum.
- There is no clear record of the form of the price reduction that was negotiated.
The problems start when variations occur that are to be measured and evaluated at the contract rates and prices. The Contractor argues that the rates and prices should be those shown in the bills of quantities and the Consultants/Employer argues that the rates and prices should be reduced by the same percentage as the price reduction agreed during tender negotiations. I was asked for my opinion, on which is the correct way to treat this matter.
To resolve this, we must first look at the intentions of the parties during the tender negotiations. This would usually take one of two forms i.e. a lump sum reduction was agreed upon or a percentage reduction was agreed upon. In the absence of any records to clarify the situation, however, we must look at the signed contract documents and in particular the bill of quantities to ascertain the intentions at the time. The following are the likely scenarios and outcomes:
- The agreed reduction is shown as a negative lump sum in the final summary of the bill of quantities. In this case, I would consider that the price reduction was made on a one-off lump sum basis and the rates and prices should remain as shown in the bill of quantities.
- The bill of quantities is re-priced with the rates reduced by the agreed percentage, in which case, it is clear that the adjusted rates and prices should be used for the evaluation of variations.
- The agreed reduction is shown as a percentage of the tender price in the final summary of the bill of quantities. The matter here is not so clear-cut, but I would conclude that if the rates and prices were not amended in the bill of quantities by the same percentage, then variations should not be subject to the same percentage reduction.
My opinion in the third case is supported by the legal principle of contra preferentem, for which Osborn’s Concise Law Dictionary offers the following definition:
‘The doctrine that the construction least favourable to the person putting forwards an instrument should be adopted against him’, where “instrument” is defined as ‘A formal legal document in writing’.
Simply put, this means that the drafter of the document had every chance to produce a clear and unambiguous document and if any mistakes, ambiguities, or conflicts exist in the document, they must be interpreted in the favour of the other party. In our situation, if the Employer, as the party responsible for compiling the contract documents, did not ensure that the contract rates and prices in the bill of quantities were adjusted to reflect the percentage price reduction, the reduction should be regarded as a lump sum and the unadjusted rates and prices should be used to evaluate variations.
The lesson to be learned here is that those responsible for the preparation of the contract documents should ensure that the principle and form of the negotiated reduction are very clearly shown in the bill of quantities and possibly also clarified elsewhere in the contract documents.
This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt.
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