Construction projects are expensive, and they usually end up being more expensive than agreed. The principal often tries to mitigate this risk by concluding a lump-sum contract.
Terms such as "lump-sum", "fixed price" or "all-inclusive price" often lead to the misimpression that the price payable upon completion of the construction will not be higher than agreed. This mistake has led to massive financial difficulties for many principals when the final invoice is issued by the contractor. Even a lump-sum is nor carved into stone. An agreement on a lump-sum will result in the same final price as that originally agreed only if during the construction period no alterations have been made to the construction plans, methods, etc. But anyone who has dealt with construction work knows that a construction project is rarely built exactly as planned.
Especially in times of financial crisis, contractors try to fill their order books by offering very "budgetised" prices. Contractors even expect that they will charge more in the end than the price first offered. Thus, contractors expect that they will find a way to argue that they are entitled to surcharges due to changes in circumstances. The term used is "Claim Management". Claim Management is a tool used by parties to a building contract to either claim surcharges to an agreed lump-sum price or to counter such claims.
Surcharges are usually claimed in connection with variations. Such variations can be categorised in many ways, including: (i) changes in the scope of work, (ii) obstructions and (iii) discrepancies in the interpretation of the construction agreement.
Contract drafting is important, but cannot cover everything
Variations usually result in the contractor claiming surcharges. Of course the principal does not have to accept all such claims. Whether the principal must accept such claim is on the first hand a contract question, and therefore a contract drafting question. However, agreeing on a lump-sum expressis verbis is not enough to ensure that the contractor may not raise claims for surcharges for variations. The construction agreement must, therefore, explicitly state how variations will be treated.
Most importantly, there must be a comprehensive frame work of clauses clarifying the contractor's duties upon becoming aware of a variation that might lead to an increase in costs (or timeline). On the other hand, there must also be wording clarifying the consequences if the principal does not respond to information about a possible increase of costs sent by the contractor in due time.
Next to the construction agreement and the applicable law, standard norms such as ÖNORMEN (or, as the case may be, VOB or similar) must be kept in mind. In Austria ÖNORM B 2110 is highly relevant for construction projects. But the ÖNORM does not contain enough clauses on claim management. So this issue must be covered in the construction agreement. International standard contracts, such as the FIDIC samples, can be used as guidance when drafting such clauses. But keep in mind that especially the FIDIC samples originate from legal systems not entirely comparable to continental European ones.
Finally it is important that the principal understand that thoroughly documenting the communication with the constructor is crucial to defending oneself against claims for surcharges. While professional construction companies usually employ whole departments just for claim management, principals seldom do so and, thus, are usually in a weaker position when it comes to proving which variations have been agreed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.