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Investigating the Contractor’s Financial Risk under a Fixed-Price Contract during Crisis Time: The Case of the COVID-19 Pandemic

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posted on 2024-05-23, 10:36 authored by Nadeeshani Wanigarathna, Tom Gibbens, David King, Mark Tree

Fixed price contracts are common in construction. However, extreme turbulences within the construction sector due to the COVID-19 pandemic and other events over the last few years questioned the suitability of fixed price contracts during crisis times. This research investigated the financial loss experienced by construction contractors bounded by a fixed price contractual mechanism during the crisis induced by the COVID-19 pandemic. Financial implications of fixed and fluctuating price contracts were modeled using cost data from a typical construction project and two construction price and cost indices published by the BCIS UK. A total of 12 project scenarios were modeled to represent 3 projects that started a few months before the pandemic, agreed and started during the early phase of the pandemic and agreed and started during the exit phase. Findings show that fixed priced contracts agreed upon before the pandemic and ended in the early months of the pandemic were not in an adverse financial situation. Fixed priced contracts agreed before the pandemic and completed during the pandemic had a high chance of falling into a negative financial crisis, particularly if the project lasted longer. Fixed priced contracts agreed during the exit phase of the pandemic were in a significant adverse financial situation. Fluctuating price contracts could place contractors in a favorable position to avoid significant financial losses during crisis times. Other limitations associated with mechanisms that need to be considered and addressed through further research were also discussed. The finding highlighted the deficiencies in conventional practices of forecasting construction costs and market trends. It emphasized the need for investigating alternative cost modeling approaches that could consider multiple stressors and cascading impacts of such events during crisis times.

History

Refereed

  • Yes

Volume

16

Issue number

3

Publication title

Journal of Legal Affairs and Dispute Resolution in Engineering and Construction

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  • Accepted version

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Article

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  • School of Engineering and The Built Environment Outputs

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