Two councils put out the same job: 1.4 kilometres of road rehabilitation with kerb replacement and drainage works. One issues it as a lump sum. The other issues it with a schedule of rates and an estimated bill of quantities.

The scope is the same. The drawings are the same. The specification is nearly identical. And the two jobs carry entirely different risk, should be priced with different margins, and will behave completely differently when the subgrade turns out to be softer than expected across 300 metres.

A contractor who prices both the same way is, on one of them, working for less than they think.

The model decides who owns the risk

Strip away the terminology and every pricing model is answering one question: when the job turns out to need more than anyone expected, who pays for the extra?

Under a lump sum, the contractor bears the risk of delivering the work for the agreed price, unless the contract allows the price to be adjusted.^[1] Under a schedule of rates, the principal bears the quantity and cost risk, because the parties agree unit rates for the resources required and payment is calculated on the actual quantities used.^[1]

That single sentence pair explains almost everything that follows, including why lump sum tenders should carry a higher contingency than schedule-of-rates tenders for the same work, and why a contractor who wins a lump sum job on a schedule-of-rates mindset gets hurt.

	Lump sum	Schedule of rates	Cost-plus
Who carries quantity risk	Contractor	Principal	Principal
Who carries rate / productivity risk	Contractor	Contractor	Principal
Price certainty for the principal	High	Moderate	Low
Design definition required	High	Moderate	Low
Contractor contingency needed	Highest	Moderate	Minimal
Administration burden	Low	High — everything is measured	Highest — everything is substantiated
Typical civil use	Well-defined discrete works, building-type structures	Roadworks, drainage, earthworks, maintenance panels	Emergency works, undefined scope, early works

Note the second row, because it is the one contractors overlook. A schedule of rates transfers quantity risk to the principal, but it leaves productivity risk squarely with you. If you priced pipe laying at 90 metres a day and you achieve 60, remeasurement does not help — you are paid for the metres, at your rate, however long they took.

Lump sum

A single price for a defined scope. The contractor is paid a fixed amount regardless of the quantity or cost of resources actually consumed, so the risk sits with the contractor and must be accounted for in the contract sum.^[1]

What it means when you price it

• Your take-off is your risk. If you measure 1,180 tonnes of asphalt and the job needs 1,290, the difference is yours. There is no remeasurement to save you.
• Scope ambiguity is expensive. Anything the documents leave unclear is a candidate for the principal’s interpretation, and under a lump sum you carry the gap. This is why tender-period clarifications matter more on lump sum work than on any other model.
• Contingency has to be real and has to be quantified. Not a round percentage added at the end, but an allowance built against identified risks — thin geotechnical information, uncertain service locations, weather exposure in the programmed season.
• The upside is genuine. Efficiency is yours to keep. Finish in eleven weeks instead of fourteen, or use less material than allowed, and the saving is your margin.

Where it goes wrong for civil SMEs

Lump sum suits work that can be defined completely before it starts. Much civil work cannot be, because the principal variable is under the ground. A lump sum priced on four boreholes across 900 metres is a contractor accepting quantity risk on information nobody has — which is a pricing decision, not an administrative one, and it should be reflected in the number.

The protection that survives is the latent conditions clause, which is why reading it before you sign matters so much more on lump sum work. A lump sum contract with the latent conditions clause deleted is a contractor buying the ground sight unseen.

Schedule of rates and remeasurement

The contractor submits rates for individual work items, and the final cost is calculated on the actual quantities measured during execution.^[2] The tender total is an estimate built from the principal’s estimated quantities; it is not the contract price in any binding sense.

This structure particularly suits projects where exact quantities cannot be predetermined, infrastructure works, and maintenance contracts requiring ongoing services.^[2] That is a fair description of most council civil work, which is why the model dominates the sector — and why measurement contracts are rare outside civil engineering, where the level of quantity uncertainty for the client would be unacceptable elsewhere.^[3] Where those ongoing services are the whole contract rather than a component of one, the model carries its own economics — set out in our guide to term maintenance contracts.

What it means when you price it

• Every rate must stand on its own. You cannot assume a mix of quantities. If the item quantities move independently, each rate has to be viable at the quantity it actually ends up at.
• Fixed costs need a home. Mobilisation, establishment, traffic management set-up and site facilities are not proportional to the metres you lay. Where the schedule provides lump sum items for them, use them. Where it does not, they have to be spread across measured items — and that spread is only correct at the estimated quantities.
• Read the measurement rules. How an item is measured determines what your rate has to cover. Excavation measured in-situ against excavation measured loose is a difference of 20–30% in the same physical work.
• Check whether rates are fixed for the contract term. On a multi-year maintenance panel this is a major exposure — see our guide to rise and fall and cost escalation clauses.

The administration cost is real

Remeasurement means everything gets measured, agreed and claimed. On a schedule-of-rates job the monthly cycle involves a joint measure with the superintendent’s representative, and disputes about quantities are routine rather than exceptional. Contractors who do not resource this end up accepting the principal’s measure by default. The monthly discipline is covered in our guide to contract administration for civil SMEs.

Cost-plus and cost reimbursable

The principal reimburses actual cost and pays a fee — either a percentage of cost or a fixed amount. Quantity, rate and productivity risk all sit with the principal. This is also the mechanism underneath target cost and pain-share arrangements, covered in our guide to ECI, alliances and collaborative contracting.

Cost-plus appears in civil work in a narrow set of circumstances: emergency and disaster response where the scope genuinely cannot be defined, early works packages ahead of design completion, and directed work where no rate fits. It is rare as a whole-of-contract model on government work because it gives the principal almost no price certainty, which sits badly against value-for-money obligations.

Where you do encounter it, the practical issues are administrative rather than commercial:

• Everything must be substantiated. Timesheets, dockets, invoices, plant records — to a standard that would satisfy an auditor, because it may have to.
• Define what “cost” includes before you start. Whether small tools, consumables, supervision, site overheads and insurances are reimbursable cost or covered by the fee is the argument that arises on every cost-plus job.
• A percentage fee rewards inefficiency, and principals know it. Expect scrutiny, and expect a fixed fee to be preferred on anything of size.
• Your margin is capped but your risk is minimal. That is the trade, and on genuinely undefined work it is often the right one.

Guaranteed maximum price

A hybrid: costs are reimbursed as under cost-plus, but subject to a ceiling the contractor guarantees. Savings below the ceiling are usually shared on an agreed split; overruns above it are the contractor’s.

GMP is uncommon on the $50K–$2M council work this site is written for, and appears more often on larger projects and in early contractor involvement arrangements. The thing to understand if you meet one is that it is a lump sum with extra paperwork from a risk perspective — you carry everything above the ceiling, so the ceiling has to be set with the same rigour as a lump sum price, not the optimism of a cost-plus estimate.

Hybrids — the actual civil reality

Almost no real civil contract is purely one model. The common arrangement combines them: lump sum pricing for well-defined items such as mobilisation and demobilisation of plant and equipment, with unknown components identified in the contract priced using a schedule of rates.^[2]

A typical council road job might carry:

Component	Priced as	Why
Establishment and disestablishment	Lump sum	Not proportional to quantity; known scope
Traffic management	Lump sum or time-based	Driven by duration, not by metres
Pavement excavation, asphalt, kerb, pipe	Schedule of rates	Quantities uncertain until built
Rock excavation	Provisional quantity at a scheduled rate	May or may not be encountered
Service adjustments by the authority	Provisional sum	Cost controlled by a third party
Contaminated material disposal	Provisional sum or provisional quantity	Existence and extent unknown at tender

Each of those mechanisms behaves differently at claim time, and mixing them up is a common source of lost money. Provisional sums and provisional quantities in particular are frequently misunderstood — they are covered in detail in our guide to bills of quantities, provisional sums and PC sums.

The practical instruction when you open a pricing schedule: work out which mechanism applies to each line before you price any of them. A line you assume is remeasured, which is actually lump sum, is an uncosted risk sitting in your bid.

Which model suits which civil work

Work type	Usual model	Why, and what to watch
Road rehabilitation and resurfacing	Schedule of rates	Pavement depths and areas vary once you open it up. Watch the measurement rules for excavation and the treatment of unsuitable material
Drainage and stormwater	Schedule of rates	Trench depth bands drive the rates — check how depth is measured and banded
Bulk earthworks	Schedule of rates	In-situ vs loose measure, and material classification, are the whole argument
Kerb, footpath and concrete works	Schedule of rates, often per linear or square metre	Small-quantity items where fixed costs dominate. Beware low rates on items with big set-up components
Bridges and structures	Lump sum, or lump sum with SOR elements	Better-defined scope. Lump sum risk concentrates in the foundations
Subdivision civil works	Schedule of rates, sometimes lump sum for developers	Developer-led lump sum work carries the highest ground risk of anything in this table
Maintenance panels and standing offers	Schedule of rates, fixed for a term	Rate escalation over a multi-year term is the dominant risk
Emergency and disaster works	Cost-plus or SOR	Scope genuinely undefinable. Substantiation discipline is everything

What happens when quantities move

This is the practical heart of the topic, and it is where contractors most often misidentify what kind of claim they have.

Scenario	Lump sum	Schedule of rates
You measured wrong at tender	Your loss. No adjustment	No impact — you are paid for what is built at your rate
Quantities exceed the principal’s estimate	Not applicable — no estimate to exceed	Paid at the scheduled rate for the actual quantity. This is remeasurement, not a variation
Quantities collapse well below estimate	Not applicable	Paid only for what is built. Fixed costs spread across the item are under-recovered — grounds for a rate adjustment argument
The scope changes	Variation	Variation
Quantities move so far the rate is no longer reasonable	Not applicable	Grounds to seek the rate applied with a reasonable adjustment

The row that generates the most wasted effort is the second. Quantity movement inside scheduled items on a schedule-of-rates contract is remeasurement, and claiming it as a variation signals that you do not understand your own contract. It flows through automatically at the scheduled rate; you do not need to notify it, price it or argue for it.

The row that generates the most missed money is the last. Where quantities move far enough that the tendered rate produces an unreasonable result, the standard forms allow the rate to be applied with a reasonable adjustment — and civil contractors under-use this badly. The mechanics of making that argument are in our guide to variations in civil construction contracts.

Building a rate that survives remeasurement

A rate is not a number. It is a number plus a set of assumptions, and the assumptions are what you will need eight months later when the quantity has tripled and you want the rate revisited.

Every scheduled rate should be built from, and recorded as:

1. Direct labour — crew composition, hours, classifications and on-costs.
2. Plant — items, hours, and your rate basis (owned, internal hire rate, or external hire).
3. Materials — quantities including wastage, supplier pricing and haulage.
4. Subcontract — where applicable, with the quote referenced.
5. Production assumption — the output per shift the rate depends on. This is the single most important number to record and the one most often left in someone’s head.
6. Fixed-cost allocation — what proportion of establishment, supervision or set-up is buried in this rate, and across what quantity it was spread.
7. Overhead and margin — the percentages applied.

Items 5 and 6 are the ones that turn a rate dispute into a rate argument you can win. “The tendered rate carried $6,400 of set-up amortised across 900m³ at $7.11/m³; at the 40m³ actually instructed, that set-up is $160/m³” is an argument. “That rate does not work at this quantity” is a complaint.

Keep the build-ups in a form you can reproduce. The estimating discipline that makes this routine is set out in our guide to preparing civil works cost estimates, and it pays off long after the tender closes. The supply side of that rate — what a quotation actually binds, and why freight moves it more than negotiation does — is covered in our guide to materials supply agreements.

Unbalanced bidding and why it backfires

Unbalanced bidding is loading rates on items you believe will over-run and cutting rates on items you believe will under-run, keeping the tender total competitive while improving the outcome on remeasurement. It also covers front-loading — inflating early items to improve cashflow.

It is tempting, it is common, and it is a bad bet for a civil SME for four reasons.

• Your low rates follow you into variations. Where a variation involves an item you priced keenly, the valuation hierarchy binds you to the contract rate. A rate you set to win becomes the rate you are paid when the quantity triples.
• Evaluators check for it. Rate-by-rate comparison against other tenderers and against historical rates is routine on government work, and a visibly unbalanced schedule invites questions about your understanding of the job — or an outright non-conformance.
• You may be wrong about which way quantities move. The prediction is the whole strategy, and it is made on the same thin information everyone else has.
• It compromises your rate-adjustment argument. If you want to argue later that a rate was built on assumptions that no longer hold, having deliberately distorted the rate is not a position you want to explain.

Our guide to pricing strategies for government tenders covers the unbalanced-bidding trap alongside the legitimate strategies that improve a bid without the exposure.

How variations are valued under each model

The valuation hierarchy in the standard forms runs the same way regardless of model — prior agreement, then applicable contract rates, then contract rates reasonably adjusted, then a reasonable amount determined by the Superintendent. What differs is how often you land on each step.

• Under a schedule of rates, step 2 usually applies, because a rate for something similar generally exists. That is convenient but it can be unfavourable — it is precisely the mechanism that binds you to a keen rate.
• Under a lump sum, there is often no applicable rate, so variations more frequently land at step 4 — a build-up from first principles determined by the Superintendent. That gives more room to price properly and more room to disagree.
• Under either, agreeing the price before you build it puts you at step 1, which is the only step where the number is not open to reassessment.

One further point specific to schedule-of-rates work: because remeasurement handles quantity movement automatically, the variations that arise are more likely to be genuine scope changes — new items, changed specifications, changed methods. Those are the ones worth the administrative effort, and they should be treated with the full notice and substantiation discipline.

Cashflow under each model

Cashflow is the reason civil SMEs fail, and the pricing model shapes it more than most contractors expect.

Model	Cashflow characteristics
Lump sum	Paid against a schedule of progress or milestones. Predictable, but front-end costs — establishment, materials procurement, bonds — are often carried before the first claim. Milestone-based payment is the harshest: no milestone, no payment, regardless of work done
Schedule of rates	Paid monthly for measured work. Generally smoother, and closer to the actual cost curve. The risk is measurement disputes delaying certification of part of a claim
Cost-plus	Closest alignment between spend and payment, but conditional on substantiation. Incomplete documentation delays payment directly

Whatever the model, the statutory payment regime sits over the top of it, and the contractual payment terms do not override the timing the legislation sets. The mechanics — payment claims, payment schedules, timeframes and adjudication in each state — are in our guide to security of payment in Australia.

A specific caution on milestone payments in small lump sum contracts: where the milestones are coarse — say, three payments across a fourteen-week job — you are funding the work in between. Model that before you bid, not after you win.

Reading the pricing documents properly

Before pricing anything, answer these eight questions from the tender documents. Most take a minute; all of them change the number.

1. Which model applies to each line? Lump sum, remeasured, provisional quantity, provisional sum, prime cost, dayworks.
2. Are the quantities stated as estimates, or as fixed? The words “approximate quantities” or “for tender purposes only” mean remeasurement; their absence may not.
3. What is the method of measurement? Named standard, or set out in the specification. This determines what each rate must cover.
4. Are rates fixed for the contract period, and is there any escalation mechanism?
5. Is there a dayworks schedule, and what rates does it carry? Dayworks rates often become the fallback for unvalued work.
6. How are provisional sums adjusted, and does your margin apply to the adjustment?
7. What triggers payment — measurement, milestone, or progress percentage?
8. Is there a limit on quantity variation beyond which rates may be renegotiated?

Where the answers are unclear, ask during the tender period and keep the response. A clarification on the record is worth more than an assumption, and it is one of the few things that can rescue a scope argument later. If any of the terms in those eight questions are unfamiliar, our civil construction tendering glossary defines them.

A decision framework

Occasionally you get a say in the model — on negotiated work, on a quotation, on a developer job, or when a council asks how you would prefer a package structured. When you do:

If…	Prefer	Because
Design is complete and the ground is well investigated	Lump sum	Risk is genuinely low and efficiency gains are yours to keep
Quantities are genuinely uncertain	Schedule of rates	Do not buy quantity risk you cannot quantify
Geotechnical information is thin	Schedule of rates, plus provisional items for rock and unsuitable material	Isolates the unknown rather than pricing it blind
Scope is undefined or the work is urgent	Cost-plus, or SOR with dayworks	Nobody can price what nobody has defined
Multi-year term work	Schedule of rates with escalation	Fixed rates over three years is an uncosted bet on input prices
Small, well-defined, short-duration job	Lump sum	The administration of remeasurement is not worth it below a certain size

The short version

• Lump sum puts quantity risk on you; schedule of rates puts it on the principal. Both leave productivity risk with you.
• The same job under the two models deserves different contingency. Pricing them identically means one of them is wrong.
• Work out which mechanism applies to each line before you price any line.
• Quantity movement under a schedule of rates is remeasurement, not a variation — but a rate made unreasonable by the movement can be revisited.
• Record the production assumption and the fixed-cost allocation behind every rate. That is what makes the rate-adjustment argument possible.
• Unbalanced bidding binds you to your own low rates at variation time. It is a worse bet than it looks.

References

This guide is general information for Australian civil construction businesses and is not legal or financial advice. Pricing mechanisms, measurement rules and adjustment provisions vary between contracts. All examples are illustrative. Always work from the tender and contract documents.

1. Sprintlaw — Lump Sum Contracts: How They Work and When to Use Them; Lamont Project and Construction Lawyers — Back to Basics: The Construction Contract Review — Part 4 — Cost; Blaze Business & Legal — Guide to Construction Contracts in Australia. The position that in a lump sum building contract the contractor bears the risk of delivering the work for the agreed price unless the contract allows the price to be adjusted; that under a lump sum the contractor is paid a fixed amount regardless of the quantity or cost of resources, so the risk sits with the contractor and must be accounted for in the contract sum; and that under a schedule of rates the principal bears the quantity and cost risk, as the parties agree unit rates for the resources required and payment is calculated based on the actual quantities used. ↩ ↩ ↩
2. Contracts Administrator — Schedule of Rates Contracts: Complete Guide; Mondaq — Schedule Of Rates Or Lump Sum? Pick Your Poison (Construction & Planning, Australia). Schedule of rates contracts involving contractors submitting rates for individual work items, with final costs calculated based on actual quantities measured during project execution; the suitability of the structure for projects where exact quantities cannot be predetermined, infrastructure works, and maintenance contracts requiring ongoing services; and the common combination of a schedule of rates with lump sum pricing, in which well-defined items such as mobilisation and demobilisation of plant and equipment are priced lump sum while unknown components identified in the contract are priced using a schedule of rates. ↩ ↩ ↩
3. Designing Buildings — Difference between lump sum and measurement contracts (the observation that the level of quantity uncertainty for the client means measurement contracts are rare other than on civil engineering projects). ↩