In the construction industry, contracting parties have the freedom to agree to whatever method to determine the amount of compensation for the amount of work performed on a contract. This article will discuss the general types of methods of compensation for contractors, which are: lump sum contracts, measurable or re-measurable contracts, and cost plus contracts. Although parties are free to combine or create new methods of compensation, as long as mutually agreed upon.
A lump sum contract is where a contractor agrees to perform the labor in the contract for a fixed amount or lump sum. The contractor carries the burden of being liable for unforeseen contingencies, if the expenses to complete the labor are greater than the contracted fixed amount of payment, in a lump sum contract. However, one exception is where the contractor has performed additional work outside the terms of the contract, which may be compensable. Finally, under common law, the contractor is not entitled to payment until the contractor has completed all the work under the contract.
Under a measurable or re-measurable contract, a contractor’s right to payment is determined under a contractual mechanism which considers: (1) the final amount of labor performed, which is measured; and (2) payment at the previously agreed upon rate, which is based upon the final amount of labor performed, which is valued. A contract administer must measure and value the work performed using the rates and amounts stated in the contract. The contract administrator has the power to increase or decrease the rates and amounts that are found to be unreasonable, where the actual amount of labor performed is greater than or less than what was billed. Additionally, where the work performed was drastically different than to what the contractor could have anticipated, such as worse conditions, a revision of contract rates may be appropriate.
A cost plus contract is where a contractor is compensated for both the financing of the construction project and for a fee as profit. A contractor’s right to payment arises through indemnity and is entitled to costs, such as: wages, site establishment costs, subcontractors, suppliers, and off-site overheads. Typically, cost plus contracts require evidence of the costs incurred, in which an invoice will suffice. However, invoiced costs must be deemed reasonable, or at least not challenged by the owner or contract administrator to be reimbursable. Finally, a contractor is not entitled to reimbursement for interest accrued on money borrowed to fund the construction operation.
Ray Garcia, Esq.
Board Certified in Real Estate Law
by the Florida Bar