From one of my favorite email blogs – The Construction Claims Advisor.
A fixed-price construction contract is usually just that. Sometimes, however, prices for materials or commodities such as asphalt or fuel are stipulated in the bid documents, with payment to the contractor adjusted to reflect the actual costs indicated in periodic published indexes.
From a project owner’s point of view, a price adjustment clause promotes accurate bidding. Bidders are not forced, or allowed, to speculate on future costs. There is no need for bidders to carry large contingencies as protection against volatile swings in cost. And of course for the successful bidder these features reduce the risk and uncertainty of contract performance.
In order for price adjustment clauses to work fairly and effectively, however, they must tie adjustments to the contractor’s real costs. The Mississippi Supreme Court recently struck a provision from a state highway contract because it froze “actual” costs at the contract completion deadline. By failing to account for subsequent contractor costs, the clause violated the statute authorizing the use of price adjustment clauses.
Is the fixed price contract the best contract for both parties?