| Date | 7 November 2007 |
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| Judgment | The 'Inclusive Price Principle' |
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| The Issue | The inclusive price principle described in Hudson’s Building and Engineering Contracts, 11th Edition 1995. |
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| Implication |
The inclusive price principle suggests that work that is indispensably or contingently necessary must be included within the contract price. Many standards forms of contract contradict this interpretation, however, by requiring that the works are defined within the bills of quantities. |
printIn the leading construction law text book, the eleventh edition of Hudson’s Building and Engineering Contracts, the author, the late Ian Duncan Wallace QC, set out a principle for the interpretation of all construction contracts which has not generally found favour with contractors. This was termed the ‘Inclusive Price Principle’. The inclusive price principle advocated by Wallace was founded upon the premise that the contractor is entitled to be paid the contractual price for the work defined in the contract and, crucially, that the work defined in the contract includes all work that is both ‘indispensably and contingently’ necessary. Indispensable work is all work which, by implication or as a matter of interpretation of the contract as a whole, has to be carried out in order that the final work should comply with the express requirements or descriptions in the contract documents. Contingent work is all work which is necessary to achieve completion of the described work in the face of practical difficulties or eventualities or damage to the works during construction. According to this principle of contract interpretation any additional work necessary to achieve completion must be carried out at the contractors’ expense and will not qualify for additional payment even if made the subject of an instruction. Additional payment will only arise under the terms of the contract in the event of a variation to the work. A variation will only occur where there is an alteration to the work described in the contract or already included under the inclusive price principle. The difficulties that contractors have in accepting the inclusive price principle are obvious. Modern procurement practices in the construction industry often leave considerable scope for uncertainty surrounding the scope of the works at the date of the contract and few contractors are willing to accept all the risks that this represents. A large construction project may typically take four years through planning, design, procurement, construction and completion during which time the contractor may only be given four weeks within the tendering process to quantify all the risks which may impact against quality, price and time. Often the extent of necessary work cannot be ascertained until the works have been started and essential opening up work undertaken. Moreover, the design process will never have been fully completed at the time the contact is made. Whilst in theory it must be possible to draft construction contracts that would operate perfectly satisfactorily according to the inclusive price principle, in practice this has proved extremely difficult. As a consequence, most standard forms of contract are drafted in such a way that the inclusive price principle cannot be assumed. This is particularly the case where bills of quantities or approximate quantities are included in the contract documents such as found within the applicable JCT and ICE families of contracts. In unamended versions of these contracts it is typically the case that the quality and quantity of the work to be carried out by the contractor under the contract is that which is set out in the contract bills. To the extent that there is an error of quantity or description in the bills, having regard to the applicable standard method of measurement, that error must be corrected as if it were a variation. Such a provision immediately contradicts an important component of the inclusive price principle, namely that the various contract documents should be construed as a whole and given equal weight. Under such a form of contract is it not the contract documents as a whole, but the bills which must be examined to determine the nature and extent of the work to be carried out by the contractor in consideration of the contract price. The inclusive price principle is defeated in such contracts. In other words, work may well be indispensably or contingently necessary for the completion of the project as a whole, but if it has been omitted from the bill and the standard method measurement requires that it should have been identified or measured in the bill, the contractor will be entitled to be paid his additional costs in carrying out that work. The inclusive price principle relies upon an assumption that where a standard method of measurement is used in the preparation of the bills, the employer does not warrant that the bills have accurately been prepared in accordance with that method. This is not, however, how many of these standard forms are drafted and of course the contracting fraternity will say this is with good reason. During the tender period tenderers should be afforded a level playing field and in the short time available they cannot be expected to look behind the descriptions and quantities contained in the bills of quantities to make their own adjustments for the risk of error or omission. Contractors want to be able to price what they had been asked to price in the bills, safe in the knowledge that they will be paid for any work which they are required to carry out which has been missed from the bill.
CJ-0744
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