Pitfalls of a Fixed Price Contract, by Corinne Maddox, CCM, CFM

Although a fixed price or lump-sum contract is the most common type of contract used and appears to be a very straightforward approach, it is not as simplistic as it seems. The price is based on a set of bid documents, which often can be interpreted many ways and are impossible to prepare without some errors and omissions. Once the contract is awarded, any ambiguities are potential change orders with an extra cost. The project manager should thoroughly review the documents and make corrections prior to issuing for bids, if possible. If time does not permit this, a review during the bidding phase is necessary. Changes and clarifications should be formally issued to all bidders as addenda or negotiated with the preferred bidder prior to the contract award. Often contractors include "qualifications" with their bid that state exclusions and their interpretation of questionable items (usually a lower cost solution than what was intended). These should be reviewed carefully and discussed prior to contract award. Also, by requiring contractors to breakdown their price using a bid form with specified line items, bids can be easily compared and omissions and errors are fairly easily identified. Finally, review the scope and any questionable items with the contractor before awarding the contract. Remember, your negotiation power is greatest before the contract is awarded.