Quantity-regulated contracts: what should you watch out for?
In the building and civil engineering industry, most contracts today are settled, to a greater or lesser extent, on the basis of unit prices – that is, a price per unit of a material or a service.
This could be per m3 of soil or per linear meter of pipe. The unit price is also used if larger or smaller quantities are needed.
Using unit prices creates transparency and clarity about the price and the price risk the parties take on. Because construction projects are complex and carry a built-in risk of cost increases, clients sometimes tender construction contracts as quantity-regulated contracts, where both the price risk and the quantity risk are shifted to the contractor once the contractor has verified the quantities. In this article, we take a closer look at the challenges and pitfalls that can come with quantity-regulated contracts, and offer advice and guidance on what you should pay particular attention to.
What are quantity-regulated contracts?
In its ‘pure’ form, a quantity-regulated contract is one where the contract is tendered with quantities that the client has assumed and that are not binding: the so-called stipulated quantities. The contractor submits a bid (unit prices) on the stipulated quantities, and if, for example, the stipulated quantities turn out to need increasing, the contractor is entitled to additional payment under AB 18 § 24(1) and (2). Here, the client takes on the quantity risk and the contractor the price risk.
In practice, however, it is not uncommon for the client to try to change the allocation of the quantity risk, e.g. by tendering the contract on the basis of stipulated quantities that the contractor must verify. The contractor is then no longer entitled to additional payment for increased quantities unless these are due to unforeseen circumstances. The contractor thus takes on both the price risk and the quantity risk, which is a significant departure from the risk allocation of the AB system. Not surprisingly, strict requirements are therefore imposed in practice on the content of such contracts.
Which construction projects are suited to quantity-regulated contracts?
Quantity-regulated contracts are best suited to simple construction projects, as measuring and calculating quantities will be relatively easy here. If a quantity-regulated contract is to be used for a larger, more complex and installation-heavy project, a much higher level of project detail is required to allow accurate and correct measurement and calculation of the quantities.
Challenges and pitfalls
One of the most fundamental challenges of quantity-regulated contracts is the project’s level of detail. Detailing projects is expensive, but if the project is not detailed enough, the basis for measuring quantities is insufficient, and the risk of claims for additional payment under a quantity-regulated contract increases.
The increasing digitalization of construction can make it both faster and cheaper to detail projects and create better conditions for measuring and calculating quantities, as this can be done through automatic quantity take-offs from the digital building models.
Digitalization is not without its challenges, however, e.g. as regards which measurement rule is to be applied in quantity take-offs. This problem is already familiar from the analog era, but in the digital context it takes new forms. It is far from certain, for example, that the various software solutions the parties use work with the same measurement rules, and important information relevant to measurement may be lost when building models are converted from one software format to another. Both give rise to a risk of flawed quantity take-offs.
Another challenge is that errors in the quantity verification often only become apparent late in the project, once execution has begun, creating a need to purchase additional quantities. This can therefore give rise to disputes.
In practice, strict requirements apply to quantity-regulated contracts
Quantity-regulated contracts must be worded clearly and unambiguously. In several awards, arbitral tribunals have set aside quantity-regulated contracts on the grounds that the contractual basis was unclear.
If, for example, it is unclear which measurement method is to be used when verifying the quantities, the doubt will as a starting point count against the client, so the contractor is entitled to additional payment where there are discrepancies between the measurement made in the quantity verification and the quantities actually used, cf. TBB 2021.348 VBA.
Another issue is inaccuracies in the stipulated quantities that the client specifies in the bill of quantities. If the contractor’s quantity verification reveals major deviations from the stipulated quantities, the contractor may not be bound by its original unit price. This applies if the stipulated quantities were stated too high, cf. KFE 2015.75 VBA. However, it is doubtful whether it also applies if the stipulated quantities were stated too low, cf. TBB 2019.179 VBA. There is even an example in arbitration practice where excessive quantities specifically led to the unit prices being regarded as a fixed price, cf. TBB 2012.583 VBA. Even though the stipulated quantities are not binding, the client must therefore still make sure that they are accurate.
Finally, arbitral tribunals are also reluctant to recognize agreements that enrich one party – that is, where a party receives a performance without having to provide anything in return. This applies, for example, to quantity-regulated contracts intended to generally exclude the contractor from additional payment for increased quantities, cf. TBB 2016.823 VBA.
3 points to consider before entering into a quantity-regulated contract
Is the project detailed enough?
As a client choosing a quantity-regulated contract, it is important that you make sure the project is detailed to an extent that allows an accurate quantity take-off. If it is not, you should consider whether the project needs to be detailed further, or whether this is the right type of contract for the project.
Is the contract clear and unambiguous?
Next, as the client, you must make sure that the contract is worded clearly and unambiguously. Is it clear that the contract is a quantity-regulated contract intended to verify and lock in quantities? Have the stipulated quantities been stated accurately in type and extent? And is the method for the contractor’s quantity verification (the data basis, the measurement rules and the verification process) described clearly and unambiguously? It will generally never be sufficient simply to write “the contractor must carry out a quantity verification”.
Is it appropriate to shift both the price risk and the quantity risk to the contractor?
Finally, as the client, you should carefully consider whether, for the specific project, it is appropriate to shift both the price risk and the quantity risk to the contractor and thereby depart from the AB system. Even though it may sound tempting, it can affect the project in unfortunate ways: either because the contractor instead prices in risk premiums and the purpose of the quantity-regulated contract is lost, or because an uneven allocation of risk from the start often creates a poor climate for collaboration between the parties.
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