Price and payment conditions in construction contract
(Правовое руководство по составлению строительных контрактов)
Three main methods of pricing are in common use in works contracts. These are the lump-sum, cost-reimbursable and unit-price methods. Under the lump-sum method, the purchaser is obligated to pay a certain amount which remains constant unless it is adjusted or revised, even though the costs of construction turn out to be different from those anticipated at the time of the conclusion of the contract (paragraphs 2, 6 to 9).
Under the cost-reimbursable method, the purchaser is obligated to pay all reasonable costs incurred by the contractor in constructing the works, together with an agreed fee (paragraphs 2, 10 to 24). Under this method, the purchaser bears the risk of an increase in the costs of construction over those anticipated at the time of the conclusion of the contract. The risk of an increase in construction costs borne by the purchaser may be limited by agreeing upon a ceiling on the total amount of reimbursable costs or a target cost (paragraphs 13 to 15). An incentive to economy and speed of completion of construction may be created by a target fee (paragraph 23).
Under the unit-price method, the parties agree on a rate for a unit of construction, and the price is determined by the total units actually used. The risk of cost increases which occur because the actual quantity of units exceeds the quantity estimated at the time of the conclusion of the contract is borne by the purchaser, while the risk of increases in the cost of each unit is borne by the contractor (paragraphs 2, 25 to 27).
If the purchaser is interested in completion of construction earlier than envisaged in the contract, bonus payments may be agreed in the contract (paragraphs 28 to 30).
Fluctuations in the exchange rate of the currency in which the price is determined may create certain risks for the parties which might be dealt with in the contract (paragraphs 31 to 37).
Even if a lump-sum price or unit-price rate is employed, the parties may wish to provide for the price to be adjusted or revised in specific situations (paragraphs 38 to 62). The contract might provide for an adjustment of the price when the construction under the contract is varied, when incorrect data are supplied by the purchaser, when the contractor encounters unforseeable natural obstacles, and in the case of changes in local regulations and conditions (paragraphs 41 to 46).
The revision of the price due to a change in construction costs may be effected on the basis of an index clause (paragraphs 49 to 55). Another approach may be to use the documentary proof method. That approach may, however, be appropriate for use only in cases where an index clause cannot be used, and may be limited to portions of the price based on unstable factors (paragraphs 56 and 57).
Changes in the exchange rate of the price currency in relation to other currencies may be dealt with through a currency clause (paragraphs 58 and 59) or a unit-of-account clause (paragraphs 60 to 62).
The payment conditions in the contract may provide for specified percentages of the price to be payable at different stages of construction. They may also stipulate modalities of payment and indicate the place of payment (paragraphs 63 to 66).
An advance payment by the purchaser may be limited to the portion of the price reasonably needed to cover the contractor's expenses in the initial stages of the construction and protect him against loss in the event of termination of the contract in the initial stages (paragraph 67). Payment of portions of the price during construction may depend upon the progress of construction (paragraphs 68 to 74).
A certain percentage of the price may be payable after acceptance or, in some cases, take-over, of the works upon proof that construction has been successfully completed (paragraph 75), with the remainder of the price payable only after expiration of the guarantee period (paragraph 76). If a credit is granted by the contractor to the purchaser, the portion of the price covered by the credit may be payable in installments within a certain period of time after take-over or acceptance of the works (paragraphs 77 to 79).