In construction contracts, how a contractor gets paid is not just a commercial term it defines risk, cash flow, claims, and how disputes are resolved.
Under the FIDIC suite of contracts, three primary payment mechanisms are used: Lump Sum, Re-measurement, and Cost Plus Profit.
Each method has a unique structure and carries distinct legal implications, especially when disputes arise between the contractor and the employer.
This article breaks down each model, explains how FIDIC governs them, and what lawyers should watch for when advising clients or representing them in arbitration.
1. Lump Sum Contracts
Definition:
A fixed total price for completing the defined scope of work. The contractor bears the risk of cost overruns.
FIDIC Reference:
– Common in FIDIC Silver Book (Design & Build)
Legal Implications:
– Any variation beyond the defined scope may entitle the contractor to extra payment under Sub-Clause 13.3.
– Disputes often arise when the employer alleges the contractor should have foreseen certain conditions.
– Legal strategy involves a strict interpretation of scope and variation procedure.
Key Legal Questions:
– Was the scope clear and complete?
– Was the variation properly instructed?
– Did the contractor comply with notice provisions?
2. Re-measurement Contracts
Definition:
The contractor is paid based on the actual measured quantities of work performed, using unit prices from the Bill of Quantities (BoQ).
FIDIC Reference:
– FIDIC Red Book, Sub-Clause 12.3 – Valuation of Work
Legal Implications:
– Disputes arise over quantity measurement, classification, and omitted work.
– Lawyers must understand CESMM or any adopted method of measurement.
– Proper documentation and Engineer’s impartiality are often under scrutiny.
Key Legal Questions:
– Are the BoQ rates applicable to the executed work?
– Did the Engineer measure fairly?
– Are the quantities verifiable by site records?
3. Cost Plus Profit Contracts
Definition:
The contractor is reimbursed for actual, auditable costs, plus a profit percentage (5% by default if not stated).
FIDIC Reference:
– Sub-Clause 1.1.20 – “Cost plus Profit”
– Used in variations, claims under Clause 20, and termination under Sub-Clause 15.6.
Legal Implications:
– Entitlement depends on the contractor’s ability to prove “reasonable cost”.
– Disputes arise from unclear records, exaggerated costs, or disallowed items.
– Profit must be calculated in accordance with agreed terms or default rates.
Key Legal Questions:
– Are cost records credible and contemporaneous?
– Is the profit applied correctly (before or after tax/deductions)?
– Were all reimbursed items contractually permitted?
How Lawyers Should Approach Payment-Related Disputes
- Clarify the Method Early:
Many disputes arise because the contract mixes pricing models or lacks clear definitions. A lawyer must identify whether the payment is lump sum, re-measured, or reimbursed and whether the contract allows switching methods.2. Preserve Evidence:
Whether arguing for or against payment, contemporaneous records, drawings, photos, delivery notes, and invoices are essential.3. Understand the Engineer’s Role:
In FIDIC, the Engineer certifies payment but is also subject to review or challenge. Lawyers must assess whether the Engineer acted impartially.4. Prepare for Arbitration:
FIDIC contracts are commonly referred to as arbitration. Payment disputes often depend on how well the contractor complied with procedural requirements, notices, claim timelines, and substantiation.
Conclusion
Each payment method under FIDIC Lump Sum, Re-measurement, and Cost Plus Profit is more than a pricing tool, it’s a legal framework that dictates entitlements, burdens of proof, and dispute resolution strategy.
Whether you represent a contractor or employer, understanding the implications of each method is crucial to protecting your client’s interests and building a strong case.