In a fixed lump-sum contract, a contractor bears the risk of cost overruns unless changes to the original plans are authorized in writing, and the additional costs are agreed upon by both parties in writing. The Supreme Court has affirmed this principle, highlighting that contractors cannot recover additional costs for work outside the original scope without explicit written authorization and agreement on pricing. This protects project owners from unforeseen expenses and ensures contractors adhere to the agreed-upon terms, fostering financial predictability and accountability in construction projects.

When a “Fixed Price” Isn’t: The Case of Unapproved Steelwork Costs

Leighton Contractors Philippines, Inc. (Leighton) and CNP Industries, Inc. (CNP) entered into a subcontract for structural steelworks in a fiber cement plant project. The agreement stipulated a fixed lump-sum price of P44,223,909. Later, revisions to the structure’s columns necessitated adjustments to roof ridge ventilation and crane beams, leading CNP to claim additional costs. The central legal question was whether CNP could recover these costs despite the fixed lump-sum agreement and the lack of written authorization for the changes.

The dispute arose after Leighton engaged CNP as a subcontractor for the steelworks. Initially, CNP submitted a proposal estimating the project to require 885,009 kgs. of steel, which Leighton accepted at the fixed price. However, subsequent revisions to the fabrication drawings led CNP to claim additional costs amounting to P13,442,882. Despite these revisions, the parties signed a subcontract that explicitly stated the fixed lump-sum basis and disclaimed any additional payments for quantity errors. The subcontract clearly stated:

(B) Subcontract works.

To carry out complete structural steelworks outlined in the Sub-contract Lump Sum Price [of P44,223,909] in accordance with the Main Drawing and Technical Specifications and in accordance with the Main Contract, all of which are available on Site.

(c) Special Conditions of the Sub-Contract.

x x x x x x x x x

2. Notwithstanding the provisions of Clause 11(4) of the General Conditions of the Sub-contract, this Sub-contract is on a Fixed Lump Sum basis and is not subject to re-measurement. It is the responsibility of [respondent] to derive his own quantities for the purpose of the Lump Sum Sub-contract price. No additional payments will be made to [respondent] for any errors in quantities that may be revealed during the Sub-contract period. (emphasis supplied)

x x x x x x x x x

When CNP sought to recover the additional costs, Leighton refused to pay, citing the fixed lump-sum agreement. The case eventually reached the Construction Industry Arbitration Commission (CIAC), which initially ruled in favor of CNP. The CIAC reasoned that the revisions constituted “additional works” not included in the original lump-sum price, particularly because the fabrication drawings were not finalized when the subcontract was executed. However, Leighton appealed this decision to the Court of Appeals (CA), arguing that the CIAC disregarded Article 1724 of the Civil Code, which governs claims for additional work in construction contracts.

The CA affirmed the CIAC’s decision, prompting Leighton to elevate the case to the Supreme Court. Leighton argued that the subcontract explicitly included the disputed works and that CNP failed to comply with the requirements of Article 1724 of the Civil Code. The Supreme Court found merit in Leighton’s arguments, emphasizing the importance of adhering to the terms of a fixed lump-sum contract and the necessity of written authorization for any changes.

The Supreme Court grounded its decision in the **parol evidence rule**, which dictates that when an agreement is reduced to writing, the written document contains all the agreed terms. Evidence of other terms is inadmissible unless an exception applies, such as subsequent modification of the agreement. In this case, the Court examined whether the signing of a progress report by Leighton’s quantity surveyor, Simon Bennett, constituted a modification of the subcontract. The Court noted that Bennett was not authorized to approve changes or costs, and CNP was aware of this limitation.

The Court highlighted the significance of Article 1724 of the Civil Code in contracts for a stipulated price. This article mandates two key requisites for recovering additional costs: (1) written authority from the project owner authorizing the changes, and (2) written agreement on the increased price. The Court emphasized that compliance with these requisites is a condition precedent for recovery and that the absence of either condition bars any claim for additional costs. According to the Court, “Neither the authority for the changes made nor the additional price to be paid therefor may be proved by any other evidence.”

In this instance, the Supreme Court noted CNP’s failure to present the written authorization and agreement required by Article 1724. Instead, CNP relied on the progress report signed by Bennett, who lacked the authority to approve changes. The Court held that the subcontract was never modified and that Leighton could not be held liable for the additional costs. This ruling reinforces the principle that in a fixed lump-sum contract, the contractor assumes the risk of measurement errors and is bound by the agreed-upon price. This also protects project owners by upholding contract sanctity.

Moreover, the Supreme Court stated that CNP, by entering into a fixed lump-sum contract, undertook the risk of incurring a loss due to errors in measurement. The subcontract explicitly stated that the stipulated price was not subject to remeasurement. Since the roof ridge ventilation and crane beams were included in the scope of work, CNP was presumed to have estimated the quantity of steel needed for those portions when it made its formal offer on July 5, 1997. Inherent to a fixed lump-sum contract, Leighton was only liable to pay the stipulated subcontract price.

FAQs

What type of contract was involved in this case?	The case involved a fixed lump-sum contract, where the price is set regardless of the actual costs incurred by the contractor.
What was the main issue in dispute?	The main issue was whether the contractor could recover additional costs for work that was allegedly outside the scope of the original fixed-price agreement.
What does Article 1724 of the Civil Code say about additional work?	Article 1724 states that a contractor cannot demand an increase in price for additional work unless the changes were authorized in writing by the owner and the additional price was agreed upon in writing.
What evidence did the contractor present to support its claim for additional costs?	The contractor presented a progress report signed by the project owner’s quantity surveyor, claiming it as proof of approval for the additional costs.
Why did the Supreme Court reject the contractor’s claim?	The Supreme Court rejected the claim because the quantity surveyor was not authorized to approve changes, and the contractor failed to provide written authorization and agreement as required by Article 1724.
What is the parol evidence rule?	The parol evidence rule states that when an agreement is put in writing, the writing is presumed to contain all the agreed terms, and no other evidence can be admitted to vary its terms.
What is the significance of this ruling for construction contracts?	The ruling reinforces the importance of clearly defining the scope of work and price in construction contracts and obtaining written approval for any changes to avoid disputes over additional costs.
Who bears the risk of measurement errors in a fixed lump-sum contract?	In a fixed lump-sum contract, the contractor bears the risk of measurement errors, as the price is fixed regardless of the actual quantities or costs.

The Supreme Court’s decision in this case serves as a reminder of the importance of clear and comprehensive contracts in construction projects. Parties entering into fixed lump-sum agreements must ensure that all potential changes are documented and agreed upon in writing to avoid costly disputes. This proactive approach protects both owners and contractors, fostering transparency and predictability throughout the project lifecycle.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Leighton Contractors Philippines, Inc. vs. CNP Industries, Inc., G.R. No. 160972, March 09, 2010