05/10/2010 Guaranteed maximum price construct…

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GUARANTEED MAXIMUM PRICE CONSTRUCTION CONTRACT

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The term guaranteed maximum price when applied to a construction Contract Definitions
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.

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05/10/2010 Guaranteed maximum price construct…
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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