Lump sum or measured contract: effects on the bill

Under a measured contract the consideration is determined by applying the contract unit rates to the quantities actually executed. Quantity is therefore a variable: if more square metres are built than forecast, the amount rises.

Under a lump sum contract the consideration is fixed for the completed works as described by the design. Quantity is not a variable: the contractor undertakes to deliver the works as designed for the agreed price, and quantity differences against the bill fall to its cost or its benefit.

Aspect	Measured	Lump sum
Basis of consideration	Quantities executed times unit rates	Fixed amount for completed works
Quantity risk	Borne by the contracting authority	Borne by the contractor
Function of the bill during construction	Benchmark and basis of rates	Basis for apportioning work stage percentages
Valuation	By measuring quantities	By work stage percentages achieved
Sensitivity to take off errors	Absorbed by the valuation process	Generates dispute or windfall

Article 18 of the code provides that the bill of quantities forms part of the contract where it is referred to in the tender notice or the invitation to tender, carrying forward the approach of the previous regime. Article 31 of Annex I.7, however, requires the bill to be attached to the draft contract as a document of the detailed design.

Reading the two provisions together has fuelled a technical debate that cannot be regarded as settled, and the question has different practical implications under each form. The practical implications concern valuation.

Under a measured contract the issue is largely absorbed by the mechanics of valuation: quantities executed are measured and valued at contract rates, and the design bill retains a role as reference and benchmark. Quantities executed are measured and priced at contract rates.

Under a lump sum contract the issue is more sensitive, because the bill is the document describing in detail the completed works whose price has been fixed, and the percentages governing interim payments are derived from it. The bill describes in detail the works whose price has been fixed.

Under a measured contract valuation applies to the quantities executed the net unit rates taken from the schedule of rates, reduced by the discount offered at tender. The libretto delle misure and the registro di contabilità perform their full function, and every operation is measured.

Under a lump sum contract valuation proceeds by percentages. The amounts and percentages relating to specific parts of the works are derived at detailed design stage from the bill of quantities and aggregated in tabular form, and for the purposes of interim payment may also be shown broken down into their principal components.

The operational consequence deserves emphasis. Under a lump sum contract the quality of the apportionment affects the financial profile of the whole project: unbalanced percentages produce interim payments that do not track actual progress, causing cash pressure for the contractor or exposure for the authority.

The apportionment is built from the amounts the bill attributes to each part of the works, and the result is a table that becomes the reference for interim payments. The resulting table becomes the reference for interim valuations.

Part of the works	Amount from the bill	Percentage
Excavation and foundations	148,500	16.5 %
Superstructure	234,000	26.0 %
External envelope and roofing	162,000	18.0 %
Services	189,000	21.0 %
Finishes	130,500	14.5 %
External works	36,000	4.0 %
Total	900,000	100.0 %

Two readings of this table warrant attention. The first concerns correspondence with physical progress: the percentages must reflect the actual economic weight of the parts of the works, not a linear progression over time. The second concerns disaggregation: the law allows amounts and percentages to be shown broken down into principal components, and on long duration parts such as the superstructure or the services this avoids a substantial interim payment remaining tied to completion of the whole part.

The recurring error is deriving the percentages from customary figures rather than from the bill for the particular project. On a building with a high services content, percentages built on average values produce a payment profile noticeably out of step with actual progress, and correcting it during construction requires a formal instrument.

The two forms are not rigid alternatives. Some operations may be valued as a lump sum within a predominantly measured contract, or the reverse.

In that case the law requires formalisation. Operations valued as a lump sum are identified in the instrument approving the detailed design with specific technical reasons and with the summary amount of their presumed value and their incidence on the overall tender value.

The requirement of technical reasons is not a formality. It rules out using the lump sum form to sidestep measurement on operations that could be measured, and compels disclosure of the weight of the fixed portion.

The substantive difference between the two forms is where quantity risk sits, and different behaviour at tender stage follows from it. Different behaviour at tender stage follows from it.

Under a measured contract a take off error is corrected in the valuation and does not generate dispute in principle, at most over the extent of the quantities measured. Uncertainty about quantities feeds through to the final amount payable by the authority.

Under a lump sum contract a take off error becomes a contractual matter. Understating quantities in the bill translates into an obligation for the contractor that was not priced in the bid, and the route to recovering it runs through reservations and requests for variation. Overstating produces the opposite effect and remains to the contractor's advantage.

This asymmetry explains the different attitude of contractors when bidding: on a lump sum contract the bidder's own check of the bill is an integral part of pricing, and clarification requests during the tender period concentrate on quantities rather than on technical requirements. On a lump sum contract checking the bill becomes essential.

Three practical consequences follow.

The first is that the form of consideration should be known before the bill is completed. A lump sum contract calls for a higher level of certainty about quantities than is acceptable under a measured contract, because the error cannot be recovered in the valuation.

The second concerns the structure of the document. Where a lump sum contract is anticipated, the bill should be structured around identifiable parts of the works, because the percentages will be derived from that structure. A structure organised only by work category makes the apportionment more laborious and less legible.

The third concerns lump items within the bill. Under a measured contract every item expressed as a lump removes work from the measurement mechanism and becomes an almost guaranteed point of friction during valuation. Such items should be used sparingly and only where the operation genuinely cannot be broken into homogeneous units.

In private work both forms coexist in practice, often without the contract qualifying which applies, and this is the origin of a substantial share of disputes. This is the origin of much of the dispute that follows.

A contractor's quotation built on a bill with quantities and unit rates is understood by the client as a fixed amount and by the contractor as a basis for measured valuation. The qualification therefore needs writing down, together with the valuation basis and the frequency of measurement. It is a clause of a few lines that prevents the single most frequent dispute on private sites.