I was recently involved in a project advising a subcontractor working on a swimming pool. My client called, explaining a series of problems they were encountering and asked me to advise on the best way forward. At the end of the call they mentioned, “it’s a fixed-price lump sum, and we think the contractor is going to get squeezed here, but we should be okay … right?” On quiet nights, I can still hear the echo of the alarm bells that started to ring.
As with nearly all contracts, they start with a smile, a handshake (and hopefully a signed contract) and works proceed as scheduled. Our subcontractor client had been given a series of drawings to price, submitted a tender and off they went. The phrases “fixed-price lump sum” and “guaranteed maximum price” (GMP) had been bandied around, and when our client had reviewed the contracts (a few months after starting) they seemed happy enough with what they had already signed up to. It became apparent soon after, however, that the client may have committed contract hara-kiri.
Our subcontractor was aware of the principle of a GMP: the case being that the contract sum as stated in the contract shall not be exceeded. They had been told that the subcontract would be back-to-back and as such, they were signing up to this as well. In essence, GMPs create a ceiling, meaning that if the contractor gets close to the tendered amount, they start to panic, realising that they must bear any costs higher than the GMP, and ultimately seek to pass them downstream.
Of course, there can be a pain/gain element of any GMP. This normally takes the form of comparing the tendered sum with a final account, and if the contractor can demonstrate they were the reason for any savings, they are in for a share. The NEC3 does this best through its Target Cost Options (C & D). However, we have been involved in too many projects where this is not fully understood by both parties, or shrewd employers have attempted to weigh all the gain against none of the pain.
In my opinion, the concept of a GMP is a bit of a fallacy all together. Employers use it to try to fix a price and guarantee they will not have to pay any more than was agreed at tender stage. This comes down to a misconception that this ceiling will never be breached, and when it is, and someone has to pick up the bill, it ultimately leads to subbie bashing.
Risk transfer
Regardless of the misnomer or how a GMP is dressed up, employers want price certainty and to transfer risk where they can to the contractor. Transferring risk causes problems itself, with liability, indemnities and the often relied upon transfer for everything that comes out of the heavens and lives in the ground below. If the contractor comes across these, claims will still be made and when it comes to tagging a GMP badge onto a contract as well these claims, more often than not, turn into disputes.
So what about our demolition subcontractor? Well, we know in this life there are only three certainties: death, taxes and compensation events. It is when the latter of these arise that the contractual documents and obligations are put under scrutiny, and contractors will make claims, and if these are unsuccessful, the subbie bashing ensues.
“We know in this life there are only three certainties: death, taxes and compensation events. It is when the latter of these arise that the contractual documents and obligations are put under scrutiny, and contractors will make claims, and if these are unsuccessful, the subbie bashing ensues.”
On one hand the employer believes there is a ceiling, and they have transferred risk, so there is no way that a contractor could ever expect to be paid more. On the other, we have a contractor who has had to incur additional costs to what they tendered. So what is the contractor to do? Scrutinise the documents and hope to find a legitimate claim? Not worry at all, because they have passed the same risks down the line to the subcontractor? More often, it is somewhere in the middle.
Something like this is exactly what happened to our demolition subcontractor. In short, there was an inconsistency between the drawings and spec. The employer had believed they had transferred this risk to the contractor, and as such, the contractor believed they had in turn passed this on.
When the subcontractor put together their claim, the contractor merely waved the contract and stated, “but you signed up to this fixed price, I don’t have to pay you”. This translated in reality as, “I’m not paying you unless I can guarantee the monies from the employer”, which just stinks of the type of subbie-bashing the Housing Grants and Local Democracy Acts tried to get rid of.
It is this problem where my real gripe lies with GMPs. Larger contractors, with bigger purses or legal teams can afford to either fight with the employer, or defend against claims from the subcontractor. Meanwhile, small subcontractors that can’t afford to fight, or don’t understand the implications of what they are signing up to, are put to task and forced down the adjudication or litigation route.
Misunderstandings
Understanding the implications of signing up to fixed-priced contracts cannot be understated, both on the side of the employer and contractor/sub-contractor teams. It is generally the misunderstanding that transferring of risks and attempting to shift the liability will not stop the contractor (and in turn subcontractor) from claiming. There is also a lack of understanding from our contractor clients and their teams in terms of what they are signing up to.
A GMP does not mean that you are not entitled to additional costs if a change/variation arises, and a contractual mechanism is in place for you to claim an uplift. Too often GMP contracts are signed, and “fixed price” is taken to mean “bash the subbies”. Or as with the example we have highlighted, it translates to “we need Quigg Golden for this one”.
In today’s competitive market, it’s very easy to accept every contract which comes your way, regardless of the potential risks. Why worry about the risk, as long as you’re winning the work? What’s the worst that can happen?
Thankfully, in this example we were able to resolve the matter and the subcontractor learnt a valuable lesson. Never again will they fail to understand the possible implications of a GMP and neither should anybody else who signs up to one.
Jonathan Parker is a barrister and director of Quigg Golden Solicitors
