Price in the construction industry
Price is the term used to describe the amount of compensation, usually in the form of monetary payment, that is exchanged between one party and another for the provision of goods and/or services. It represents the value that will purchase a certain amount of those goods and services.
Price forms the basis of all commercial transactions and is usually expressed in units of currency.
Price can be fixed by a contract, determined later by an agreed-upon formula, or negotiated. The ‘asking price’, ‘selling price’, 'quote' or 'tender' is requested by the seller of goods or services. This may be different from the ‘transaction price’, or ‘traded price’, which is the amount that is actually exchanged. The ‘bid price’ is the amount of payment offered by a buyer of goods or services and can be accepted or rejected by the seller.
The general factors that determine price are:
- The amount the buyer is willing to pay.
- The amount the seller is willing to accept.
- The amount the market is paying/accepting.
In terms of land and property, price is the capital value of those assets and is generally related to the income it produces or could produce. For example, the buyer of a revenue-producing property investment, such as a commercial office block, is effectively paying a capital sum today in return for the right to receive a stream of income in the future.
In construction contracts, the price offered by a supplier might be described as a 'tender' and the agreed price might be described as the 'contract sum'. However, prices are rarely 'fixed' even if they are described as being a 'fixed price'. Instead, the price is generally allowed to change under certain circumstances:
- Variations: Most contracts will contain provision for the architect or contract administrator to issue instructions to vary the design, quantities, quality, sequence or working conditions.
- Relevant events: A relevant event may be caused by the client (for example failure to supply goods or instructions), or may be a neutral event (such as exceptionally adverse weather) and may result in a claim for loss and expense by the contractor.
- Provisional sums: An allowance for a specific element of the works that is not defined in enough detail for tenderers to price.
- Fluctuations: A mechanism for dealing with inflation on projects where the contractor tenders based on current prices and then the contract makes provisions for the contractor to be reimbursed for price changes over the duration of the project.
- Payments to nominated sub-contractors or nominated suppliers.
- Statutory fees.
- Payments relating to opening-up and testing the works.
A truly 'fixed' price contract would not necessarily be in the interests of the client as it would require that the contractor prices risks over which they may have no control, and which might not arise.
Other forms of price include; guaranteed maximum price, negotiated price, open book accounting, lump sum, and so on. See Fixed price construction contract for more information.
The manipulation of prices in collusion with other suppliers is illegal.
[edit] Related articles on Designing Buildings
- Capital cost.
- Construction price and cost indices.
- Contract sum.
- Cost.
- Cost consultant.
- Cost vs price.
- Fixed price construction contract.
- Guaranteed maximum price.
- Guaranteed maximum price with target cost.
- Linear pricing.
- Market price.
- Offer price.
- Payment by results.
- Price certainty.
- Procurement.
- Provisional sums.
- Real price.
- Shadow price.
- Spon's Price Book.
- Spot price.
- Types of price.
- Unit price.
- Volume-based payment.
Featured articles and news
Top 50 firms awarded 52bn of projects in the last year
New engineering data shows.
Enhancing construction site reporting efficiency
Through digitisation and the digital revolution.
Noise in the built environment
BSRIA guide TG 20/2021.
17,000 people suffer conditions as a result of exposure to excessive noise at work.
Turning down the noise: Auditory health
A pervasive risk with far-reaching consequences.
UK Construction Week, London is here !
Debuting major international pavilions and much more.
Getting the most out of heat pumps and heating
How heat pumps work and how they work best.
Plumbing and heating for successful retrofit and renovation
Low temperature underfloor systems and heat pumps.
Cost-of-living crisis and home improvement plans
Starting on the right footing and top tips for projects.
Delays on construction projects
Types, mitigation and the acceleration of works.
From Chaucer to Fawlty Towers.
Electrotechnical excellence, now open for entries.
Net zero electricity grids BSRIA guide NZG 5/2024
Outlining the changes needed to transition to net zero.
CIOB Global Student Challenge 2024
Universitas Indonesia wins for second year running.
ECA 2024 Apprentice of the Year Award
Entries open for submission until May 31.