What to do when a fixed price contract is not being honoured

How to protect your interests and bottom line

The best way to protect your interests and bottom line is to establish a rock solid fixed-price contract with your main contractors. This should include a project plan and well put together costing for the build and deadlines to meet along the way. It should also include penalties for not hitting those deadlines, as motivators to keep the project on track. Find out more about the importance of a good contract.

However, with the rising costs of materials and inflation, builders have been reluctant to sign these contracts, or have been reneging on them and charging extra when they shouldn’t.

In some cases, where material costs have changed so significantly since the initial contract there may need to be adjustments, but these must be requested, explained, justified and agreed in writing by both parties. Sadly, we’re seeing more and more cases of builders simply charging extra, or going against the terms of their fixed-price contract, with no renegotiation, and no warning, so clients are surprised by additional costs that they had not prepared for or budgeted for at the end of the project.

As a client, you need to be on top of all the invoices and payment requests that you are being given and make sure that they are in line with the plan and with the contract that has been signed. However, it can be hard to know what they payments correlate to, and without the industry knowledge you can end up paying more for something than you have agreed to.

Once something has been paid for, it is very difficult to get it back, without expensive court cases. This is why we’d advise having a Project Manager to implement an overall strategy and process and check each invoice against the contract and the plan and question any discrepancies before the invoices are paid.

Here’s an example of where a fixed price contract was being broken by a constructor, but the client was not even aware that it was happening. We hope this helps you avoid these pitfalls for yourself.

Project Development pitfalls under the spotlight

MDCI Project Developers were called in to support a major developer engaged in the construction of 400,000m2 of infrastructure works. They were concerned that their team were over budget and behind schedule and needed independent experts to offer project supervision and monitoring and offer solutions to get the project back on track.

After a detailed analysis of the project, we discovered that there was a fixed price contract in place, but that it was based on incomplete and defective technical documentation. The project was being managed by a constructor with no previous infrastructure experience and supervised by a team without the right qualifications or experience to be able to undertake their duties.

Digging into the costs and invoices presented we discovered that the constructor was ignoring the terms of the fixed price contract. They were charging the developer above what was agreed, in advance of the works being done and at rates that had not been preapproved by the client. Unfortunately, the technical team who is supposed to oversee and authorise the works was cooperating with the constructor and so no proper oversight was being done and the client was unaware of these extra charges.

The developer was right to be concerned about the project, it was over budget and behind schedule and thankfully we were able to make a number of recommendations to address this and bring the project back on track.

However, this was not the end of this project’s issues and once again charges were being made that were not in line with the contract.

There were additional ground works and excavations needed than had been requested previously and so these were outside of the fixed price contract. However, there were terms in the contract for excavations with payment terms and proportions of 50% for soils and 50% for rock excavations. After many months of excavations and substantial bills being paid, we were asked to review the process and check whether the proportions had been respected. We could see that again the contract terms had been flouted and that a total of 70% had been charged at a much higher rate than agreed, with no technical revision or information being given to the client. Not only that, but we were able to identify that there was double charging for works that had not been executed with substantial sums being incorrectly invoiced and once again, the Client was being taken for a ride.

Last, but not least, the works did not comply with the infrastructure standards set by the Town Hall, which will cause major issues when building licences are presented for approvals and signoff. Unfortunately, repairs will be required in order to the works being signed off and licences issued. The technical direction team was colluding with the builder and signing everything off, even though it didn’t comply. Only because the developer called us in to supervise and monitor this project did these issues come to light and could be rectified. Otherwise, they would not have been any the wiser until their licences were denied.

Guarantee your return of investment.

What can you learn from this example?

Always ensure that you select a competent constructor, skilled in infrastructure works and up to date on the requirements and specifications required by the Town Hall.

Always ensure that you have an independent technical Direction team. They should have a performance contract negotiated to clear conditions by a skilled project manager to ensure your first line of defence is independent and protective of YOU and YOUR objectives.

Always ensure that where expensive investments are made in costly infrastructure works, that the project documentation is audited, correct and clear. This means that you can fall back on its contents should anything go wrong, which sadly is a common occurrence, potentially resulting in huge additional costs not budgeted.

Ensure that you always have a skilled and knowledgeable Project Manager working directly for you. Only by having an independent professional representing your interests can you control what often becomes an inherently selfish and uncontrolled environment, rather than the control ending up in the wrong hands!

How can we help?

MDCI are highly skilled and experienced project management professionals in Spain. We work alongside developers to support them and ensure the success of the project from inception to completion.

We can offer strategic analysis, consulting and feasibility studies at planning stage, to ensure that the project is a sound investment and that you have all the information you need to make the right decision. We can then oversee the project with professional project management to keep everything on track.

Alternatively, if things are going wrong with your project, we can come in and offer project rescue services to allow you to regain control and get things moving in the right direction again.

Let MDCI be your partners in your development and remove the stress and risks from the process and deliver on time and on budget. Contact us to discuss your needs.

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