In the construction industry, a construction project is usually awarded by a employer to a suitable contractor through tendering process, which may involves several tenderers who have been prequalified by consultant/s. Often, the successful tenderer or contractor is usually the lowest, if not second lowest in tender price, which is derived from a breakdown of priced items, usually in a bills of quantities (BoQ), which formed part of the tender documents.
The common notion in the industry, is that the tender price when agreed between an employer and a contractor, which forms the awarded contract price, is a reasonable and feasible sum. However, competitive pricing and uncertainties in resources, economy and other risks, often make it difficult for the successful contractor to carry out and complete the construction project profitably. Consequently, some contractors resort to relying upon pricing strategy, variations and/or loss or expenses claims, to maintain and/or enhance profitability of their construction projects.
In order to ensure a fair and reasonable pricing regime and practice, many employers employ consultants, usually quantity surveyors, to prepare tender documents and conduct tender exercises. Thereafter, they undertake to review and rationalise or adjust prices and rates contained therein, normally without changing the tender/contract sum, prior to awarding the construction project to the successful contractor. Such rationalised or adjusted prices and/or rates can then be appropriately applied to corresponding variation works during progress of the construction project.
In this article, BK Entrusty aims to provide readers with a better understanding of the practice of rationalisation of prices and/or rates in the construction industry by the following contents:-
- Definition of rates rationalisation;
- Importance of rates rationalisation;
- Timing and criteria for rates rationalisation;
- Standard forms of contract (relevant clauses);
- Case Law;
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