How do you calculate the price in a construction contract?

The price is the consideration that the contractor receives in exchange for delivering the work ordered by the client. It is an essential element in the conclusion of the contract. If the parties do not agree on the principle of the price itself, there is no construction contract. However, the parties are free to determine the criteria for setting the price. The law and practice have established various ways of defining it. Each way of articulating a price has advantages and disadvantages for both the client and the contractor. We will take a brief look at the various ways of calculating the price.

There are essentially two types of price: firm prices (art. 373 of the Swiss Code of Obligations) and effective prices (art. 374 of the Swiss Code of Obligations).

Firm prices (art. 373 CO) are divided into total prices and unit prices.

The total price (or lump-sum price) is a fixed price that fixes a single sum for an entire work, for part of a work or for a specific result (art. 373 CO). It is payable irrespective of the actual cost of carrying out the work, the quantities actually supplied or the expenses incurred. The SIA-118 standard also distinguishes between global prices (art. 40 SIA-118) and lump-sum prices (art. 41 SIA-118), the difference being that global prices may vary in line with inflation, whereas this is not the case for lump-sum prices. The fixed price is payable in exchange for delivery of the agreed work. The conclusion of a global or lump-sum price presupposes that the parties can rely on a complete description of the work to be built (detailed description, plans). This is expressly provided for in the SIA-118 standard (art. 40 para. 2 and 41 para. 2 SIA-118).

The unit price is not regulated in the Code of Obligations. SIA-118 codified the unit price system in art. 38. The unit price is a firm method of remuneration that consists of fixing the amount due in terms of units such as meters, kilograms, pieces, etc. In relation to the total price, the risk is reduced. Compared with the total price, the risk assumed is lower since the actual quantities are decisive (or at least the quantities necessary for the diligent execution of the work); nevertheless, the unit price depends on the foreseeable quantities and a risk exists at this level. To determine the amount of remuneration, the parties will multiply the unit price by the number of units. They will then carry out measurements. These may be effective or theoretical. With an effective quantity survey, the parties will count, weigh and measure the contractor’s work on site (art. 141 SIA-118). If the parties are not rigorous in carrying out measurements, they run the risk of being difficult to ascertain. For example, it will be difficult to determine the actual quantity of materials used for pipework once the trench has been closed and tarmacked. The theoretical quantity survey is based on the execution plans, and the quantities taken from the plans and the surveys carried out in the field are taken into account when calculating the price (art. 143 SIA-118).

The actual price is determined on the basis of the materials supplied and the value of the work, plus a margin for risk and profit. The contractor will thus present the price of the materials supplied and the hours spent by his workers in carrying out the work.

Agreeing a fixed price gives the parties the illusion that the price will be fixed and will not vary from start to finish. However, the fixed price is only fixed for the services agreed. The challenge for the parties will be to determine whether the services to be performed are included in the agreed fixed price or whether they give rise to added value. This issue gives rise to a great many disputes, and it is not always easy to distinguish between these two categories. Furthermore, the client does not always benefit from choosing the lowest bid, because if the negotiated price is objectively lower than the construction costs, the contractor will be tempted to reduce the costs of the work, either by not carrying out certain services or by doing them to a lower standard. This may even jeopardise the contractor’s solvency. Contractors, on the other hand, would be well advised not to enter into a lump-sum price agreement until they have studied the project carefully and made a realistic estimate of the construction costs, anticipating any unforeseen circumstances that they may have to assume in view of the agreed lump-sum price. Contractors using unit prices will be paid on the basis of the actual work carried out, thus ensuring that they are remunerated for the work actually done. However, unit prices require good organisation and coordination with the client for the execution of quantity surveys. In the absence of such co-ordination, disputes can arise over the quantity surveys, and resolving them can become very time-consuming.

In short, it is in the interests of all parties to negotiate a transparent contract so that the contractor is fairly remunerated for the work carried out, and thus has everything in his hands to ensure that the work complies with expectations and is free from defects, which should be the ultimate goal of all parties involved in a construction project.