Back to basics briefing 3: When clients try to cut contract sums

Tendering is always a risk for contractors. Most invitations to tender will make it expressly clear that there is no guarantee that a contract will be entered into, and most clients will reserve the right to vary or amend the tendered scope of work. This reflects the reality and inevitability of client changes to the project and value engineering exercises. All the contractor can do about this at this tender stage is to try and make sure that the reduced scope of work does not have a detrimental impact on the way that contract sum is being calculated.

The bigger problem is where a client does not reduce the scope per se, but seeks a reduction in the pre-agreed tender sum. This is a contractor risk because any reduced sum that is then rolled forward into a formal contract will act as a ‘cap’ on the client’s payment liability (unless there are contractually agreed variations, which are negotiated separately).

When a contract sum is expressly written into the contract, the client is not allowed to unilaterally reduce the agreed number – if the work is carried out, the contractor is entitled to be paid the contract sum. Nor is the client ordinarily allowed to unilaterally (at no cost) remove works from the overall scope, pass work to another contractor, or undertake to manage the work itself.

But if the client instructs a variation under the contract that removes work from the overall scope in an attempt to reduce the contract sum, that is allowable, but in this situation the contractor has the right to price the variation so that they are not financially disadvantaged. Ultimately, the client cannot unilaterally ‘cut’ the contract sum.