Real Estate Perspective | Circumstances and Legal Analysis of the Contractor's Breach of the Fixed-Price Clause in Construction Contracts

A fixed-price contract for construction projects (commonly known as a "lump-sum" contract) refers to a contract form in which the client and the contractor agree on a total price based on complete and clear construction drawings, quantities, and construction conditions, and the price will not be adjusted due to factors such as increases or decreases in the amount of work within the agreed range. Article 28 of the Supreme People's Court's "Judicial Interpretation (I) on Construction Engineering Construction Contracts" clearly stipulates that "If the parties agree to settle the project price according to a fixed price, and one party requests an appraisal of the construction project cost, the people's court shall not support it." In principle, once a fixed price is agreed upon, it shall not be changed, and the contractor shall complete all the work content agreed in the contract at the agreed total price. This reflects the basic rule that the contractor bears the risk under a fixed-price contract.

It should be noted that a fixed-price contract is different from a fixed-unit-price contract. A fixed-unit-price contract means that the price per unit of work is fixed, but the total settlement price varies with the actual amount of work. Under a fixed-unit-price contract, increases or decreases in the amount of work directly affect the project payment, and the total price is not capped; while under a fixed-price contract, the total price remains unchanged in principle regardless of the deviation in the actual amount of work, unless specific exceptions occur. Therefore, fixed-price contracts place higher risk requirements on contractors. The following will detail the typical scenarios in which contractors claim to break the fixed price in practice and the legal analysis.

Although the total price of a fixed-price contract is generally not adjusted, in the actual construction process, some special circumstances often arise that force the contractor to claim project payments exceeding the original contract total price. Common scenarios include: design changes, errors or omissions in the bill of quantities, force majeure, policy adjustments, differences in provisional sums, malicious low-price bidding, and significant increases in material prices. In each scenario, laws, regulations, and judicial practice have different rules on whether and how to break the total price. The following is an analysis of each scenario:

Brief Description: During construction, the client modifies the design drawings or construction standards as needed, resulting in changes in the construction content, quantity, or quality standards. In this case, the contractor often needs to complete additional work or improve construction standards beyond the contract, and the resulting costs exceed the original fixed price.

Legal Basis: Regarding the adjustment of the project price due to design changes, Article 19, Paragraph 2 of the "Judicial Interpretation (I) of the Supreme People's Court on Construction Engineering Construction Contracts" stipulates: "If the amount of work or quality standards of the construction project change due to design changes, and the parties cannot reach an agreement on the project price for this part, they may refer to the pricing methods or standards published by the local construction administrative department at the time of signing the contract to settle the project price." Accordingly, the project payment for the design change part should be adjusted: the total price agreed in the original contract only applies to the original design scope, and for the changed and added project content, the contractor has the right to settle the additional fees in accordance with the actual situation.

Judicial Practice: Courts at all levels generally support contractors in breaking the fixed price and claiming additional project payments in this situation. For example, the Jinan Intermediate Court clearly pointed out in case (2024) Lu01 Minzhong 7046 that: If objective reasons such as design changes during construction lead to changes in the amount of work or quality standards, and the two parties change the contract price through negotiation, it should be considered a normal contract change. In other words, design changes are considered a legitimate reason for adjusting the contract price, not a breach of the fixed price. The Supreme People's Court also has similar judicial opinions (such as case (2021) Supreme People's Court Minshen 286), which determine that if design changes lead to improved quality standards, the fixed-price contract should adjust the project price accordingly for that part. Therefore, as long as the contractor can prove that the engineering change is indeed due to the client and exceeds the scope of the original contract work, the claim for actual pricing of the changed part will generally be supported by the court.

Practical Points: When encountering design changes, the contractor should promptly confirm the changed content and quantity through written visa, change orders, etc., and negotiate the additional costs with the client. If no agreement can be reached, the contractor may, in accordance with the above judicial interpretation, entrust a cost appraisal to calculate the cost of the changed part according to local pricing rules. It should be noted that the calculation of the changed project price generally refers to the unit price of similar projects in the contract or the original total price conversion method to maintain consistency with the original contract pricing system. It can be seen that design changes are the primary and most clear and direct situation in which a fixed price can be adjusted.

Brief Description: Fixed-price contracts are usually based on the bill of quantities and drawings provided by the client. If the bill of quantities provided during bidding has omitted items or contains serious errors, resulting in the actual construction requiring the completion of a quantity of work exceeding the scope recorded in the bill of quantities, and the contractor did not include this part of the work in the quotation, resulting in additional costs during actual construction.

Legal Basis: Regarding the adjustment of the price due to "omissions in the bill of quantities," Article 9.5 of the "Code for Measurement of Construction Engineering Quantities" (GB50500-2013) stipulates: If there are missing items in the tender bill of quantities, the newly added project items should be priced according to the code and the contract price should be adjusted. At the same time, the code requires the client to be responsible for the accuracy and completeness of the bill of quantities. Generally speaking, from the perspective of the code, omissions in the bill of quantities are a statutory situation that should lead to price adjustments.

Judicial Practice: Because the above code is a departmental document with a lower level of authority, judicial judgments on this issue have not been unified for a time. There are mainly two viewpoints:

The first viewpoint strictly adheres to the fixed-price agreement and does not adjust the price. For example, the Jilin Higher People's Court in case (2015) Jilin Minshen No. 137 supported the validity of the clause set by the client in the bidding documents that "the contractor agrees that even if the bill of quantities is incorrect, the total price will not be adjusted." In this case, the contractor had clearly agreed in the bidding document not to adjust the price due to errors in the bill of quantities, and the court therefore determined that this agreement was binding on both parties. Courts holding this view believe that if the contract specifically stipulates that "no additional fees will be added for the amount of work exceeding the bill of quantities" and the contractor promises not to claim for omitted items during bidding, then the agreement of the parties should be respected, and it should be determined that the contractor has waived this right.

A second viewpoint is to adjust the omitted project funds. In recent years, more and more precedents have tended to protect the legitimate interests of contractors, and based on the mandatory requirements of the list price specification, it is determined that the client should bear the consequences of the list errors. For example, the Jiangsu High Court (2016) Su Min Zhong 1151 case believes that: the bidding list, as the basis for calculating the contract price, is responsible for its accuracy and completeness by the client. This mandatory obligation has the effect of regulations. The clause in the contract that stipulates that the contractor shall bear the consequences of omissions in the list conflicts with the mandatory provisions and should not be used as the basis for settlement. Based on this, the court supported the method of adjusting the price according to the actual occurrence of the omitted part by the appraisal institution. It can be seen that under this view, the client should compensate for the amount of work exceeding the scope of the contract due to omissions in the list.

In recent judicial practice, there is a tendency towards the second viewpoint, which emphasizes the correction of obviously unreasonable risk allocation based on the principles of fairness and good faith. Judges often believe that since the client is in a dominant position in the bidding, if the contractor is required to bear all the risks of list errors, it will lead to an imbalance of rights and obligations, which is not in line with legal principles. Therefore, if the contractor can prove that the omission of the list is indeed caused by the incomplete information provided by the client, the court is more inclined to adjust the price according to the principle of fairness in the Civil Code and require the client to pay for the omitted part. This has been confirmed by many court judgments in practice.

Practical Points: In the face of omissions in the engineering quantity list, the contractor should promptly raise objections. If discovered during the bidding clarification stage before signing, the contractor should request the client to correct the list or make special provisions for the adjustment method in the contract; if the omission is discovered during the construction process, the contractor should immediately notify the client and confirm the increased amount of work and price through visa changes. If the client refuses to adjust the price, the contractor can claim in the settlement or litigation that the client has violated the obligation to provide a complete list and should bear the resulting increased costs. At the same time, it is necessary to pay attention to its own prudent obligations—the court will sometimes consider the contractor's negligence in failing to carefully review the list errors, and thus weigh the responsibility allocation. In short, the contractor should actively collect evidence to prove that the omitted part of the list "does not belong to the scope of the original contract," so as to claim reasonable compensation beyond the fixed total price.

Brief Description: If force majeure events such as earthquakes, typhoons, floods, and epidemics occur during the performance of the contract, resulting in the suspension of work, damage to the project, or significant changes in construction conditions, the contractor may face problems of extension of the construction period and increased costs. For example, large-scale natural disasters cause damage to some completed projects that require rework, or epidemic control leads to interruptions in the supply of labor and materials and additional epidemic prevention expenses.

Legal Basis: Article 590 of the "Civil Code of the People's Republic of China" stipulates force majeure: Force majeure refers to objective circumstances that cannot be foreseen, avoided, or overcome. Article 591 of the Civil Code stipulates that if a party fails to perform a contract due to force majeure, the responsibility shall be exempted in part or in whole according to the impact of the force majeure. However, the law does not directly stipulate that force majeure can be used as a basis for requesting an increase in the price. Generally speaking, after the occurrence of force majeure, the contractor has the right to request an extension of the construction period and exemption from liability for delay; however, the additional costs incurred due to work stoppage and rework, unless otherwise specifically stipulated by law or contract, are generally borne by the parties themselves.

Judicial Practice: In the field of construction engineering, force majeure is usually regarded as a ground for exemption from liability rather than a ground for claim. That is to say, the contractor can be exempted from liability for breach of contract due to delay in construction period, but if the contractor claims that the client should bear the cost losses caused by force majeure, the court usually takes a cautious attitude. If force majeure only causes a delay in construction and not the inability to perform the contract, the contractor can generally only obtain an extension of the construction period and cannot request compensation for additional costs. For example, the Chongqing Intermediate People's Court held in case (2024) Yu 04 Min Zhong 749 that: the contractor failed to provide sufficient evidence to prove the fact of the flood and that the flood constituted force majeure for the project in question, and some of the losses were determined to be caused by improper construction. Therefore, the contractor's claim for an increase in the project funds on the grounds of force majeure was not supported. This shows that even if claiming force majeure, the contractor needs to bear a strict burden of proof, proving the occurrence of the force majeure event, the causal relationship between the event and the loss, and that the event has indeed reached the level of "unforeseeable, unavoidable, and insurmountable," and excluding its own responsibility.

However, extremely significant force majeure events may lead to consideration of changes in circumstances. If force majeure fundamentally changes the objective environment for the performance of the contract, and continued performance will be obviously unfair to one party, it may be possible to apply the rules of change of circumstances in Article 533 of the Civil Code to change the contract price or terminate the contract. For example, the Foshan Intermediate People's Court held in case (2023) Yue 06 Min Zhong 13617 that: the actual construction depth of the pile foundation of the project in question exceeded the original design, and all parties confirmed the final pressure value and construction standards, constituting a design change, and the increased amount of work should be included in the settlement. Although there is no clear three-party visa, the supervisor unit and the client's project manager signed and confirmed in the construction process test record and the minutes of the supervision meeting, indicating that they acknowledged the facts and had the basis for settlement. Overall, in this case, due to unforeseen objective circumstances (the actual depth requirement of the pile foundation), the amount of work increased, and it broke through the original total price lump-sum restriction by being identified as a "design change." The "unforeseen objective circumstances" are key. It can be seen that force majeure itself is not a common reason for breaking the total price, but the significant environmental changes it causes may trigger a change of circumstances, thus opening a gap for price adjustment.

Practical Points: When encountering force majeure, the contractor should notify the client in a timely manner according to the procedures stipulated in the contract and mitigate losses. When claiming rights, it is necessary to distinguish between two types of claims: exemption from liability for force majeure (exemption from delay penalty, etc.) and compensation for expenses. For the extension of the construction period, it can be claimed directly based on the force majeure clause; for expense claims, there must be a clear stipulation in the contract, otherwise the success rate will be low. The contractor can agree on a force majeure cost-sharing mechanism in the contract in advance, such as agreeing that if the force majeure continues for a certain period of time, the parties shall negotiate the cost-sharing, etc., to improve the basis for claiming additional costs in the future. In litigation, if the impact of force majeure is particularly significant and the duration is long, it can be attempted to invoke the principle of change of circumstances and request the court to adjust the contract price on a fair basis, but it is necessary to provide evidence to prove the unforeseeability of the event and the significance of the loss.

Brief Description: Engineering contracts often include provisional price clauses, that is, an estimated amount is listed in advance for certain materials, equipment, or specialized engineering whose prices cannot be determined temporarily, and the total contract price temporarily includes this amount, which will be adjusted after the actual purchase or subcontracting price is determined. Typical examples include large-scale equipment and materials, and designated subcontracted projects that are included in the total price at the bidding stage with a provisional price, and the actual difference is settled according to the facts during the actual implementation.

Legal Basis: The provisional price is essentially a temporary deposit item in the contract, and its final settlement should be based on the actual occurrence. The "Bidding and Tendering Law" and related regulations require that if the procurement content corresponding to the provisional price falls within the scope of mandatory bidding under the law and reaches the scale standard, the bidding procedures should be followed, and the price determined by the actual bidding should replace the provisional price and adjust the contract price. If it does not belong to mandatory bidding, it is usually determined by the client and the contractor according to market inquiries and comparative analysis. Based on this, the provisional price in the contract is only a temporary price, and its existence means that the parties to the contract foresee that the total price will be corrected according to the actual price in the future. Therefore, regardless of whether there is an explicit clause in the contract, the provisional price part is not truly fixed, but a price that is adjusted conditionally.

Judicial Practice: Disputes over adjustments to provisional prices are relatively rare. Usually, both parties will sign a supplementary agreement or confirmation form after the actual price is determined, adjusting the provisional price to the actual price. When hearing such disputes, courts generally respect contractual agreements and subsequent confirmations by both parties. If the client refuses to adjust according to the actual price, and the contractor provides evidence of the actual purchase contract or market price to calculate the price difference, the court will support their request for actual settlement, as failure to adjust would result in unjust enrichment for the client. For example, the Hetian Regional Intermediate Court held in case (2024) Xin 32 Min Zai 28 that: In this case, the provisional price refers to the funds reserved in the contract for potential work that may or may not occur, or for which the amount is uncertain. If this part of the work actually occurs and is confirmed by visa, it should be settled according to the facts, and this settlement payment will be added to the original contract price or adjusted from the original contract price (if the estimated amount of this provisional payment has already been included). Therefore, as long as the actual purchase has occurred and is used for the project, the contractor's claim for supplementary payment has a factual basis and contractual basis, and the probability of obtaining support is high.

Practical Points: When executing provisional price items, the contractor should operate strictly in accordance with the determination mechanism stipulated in the contract. For example, if bidding is required, cooperate with the client to complete the bidding process; if bidding is not required, a price confirmation document with the written consent of the client should also be obtained. All purchase contracts, invoices, price consultation records, etc., should be retained as evidence to prove the actual cost. The client should act in good faith, adjusting the total price downwards according to the actual price when it is lower than the provisional price, and upwards when it is higher, to fairly share the risk. During the signing stage, both parties can agree on the formula or method for adjusting the provisional price to avoid future disputes. In addition, it is necessary to abide by the laws and regulations on bidding and tendering to prevent legal risks arising from circumventing bidding—if a provisional item should have been bid but was not bid and determined directly, the resulting increased costs may not be protected by law. Therefore, the lawful performance of necessary procedures and the formation of effective contract documents are crucial for the smooth implementation of provisional price adjustments.

Brief Description: In projects with a longer construction period, it is not uncommon to encounter situations where the market prices of bulk construction materials such as steel, cement, and asphalt skyrocket in the short term. For example, fluctuations in international bulk commodity prices and sudden changes in economic policies may cause the prices of major materials to increase by tens or even hundreds of percentage points compared to the time of bidding. Under a fixed-price contract, the contractor will face a significant increase in costs and serious losses in performance, and therefore requests to break through the total price to adjust the contract price.

Legal Basis: As mentioned earlier, normal market price fluctuations are considered commercial risks that should be borne by the contractor, and generally do not allow for adjustments to the total price. However, when the price increase exceeds the reasonable expected range and reaches the level of a "major change that was unforeseeable at the time of contract signing and does not belong to commercial risk," the change of circumstances system of the Civil Code can be considered. Article 533 of the Civil Code grants the party adversely affected the right to request a change to the contract under major changes. Therefore, an abnormal surge in material prices may be deemed a change of circumstances, allowing the court to adjust the fixed total price based on the principle of fairness.

Judicial Practice: From the retrieved judicial documents, courts have mostly adopted a cautious and strict attitude towards price adjustment requests due to material price increases. Even if the material price increase significantly exceeds normal expectations, the court does not necessarily apply the principle of change of circumstances to support the contractor's claim for adjusting the contract price. In other words, unless the price increase is extremely special, the vast majority of judgments have not broken through the contractual agreement. For example, the Bengbu Intermediate Court clearly stated in case (2022) Wan 03 Min Zhong 1133 that "the increase in construction material prices is a commercial risk that should be reasonably foreseen at the time of signing, and the increase has not exceeded the normal fluctuation range," and thus rejected the contractor's request for price adjustment. Many similar cases have ruled that material price increases are within the agreed risk range and should be borne by the contractor.

However, there are exceptions: In cases of extreme and significant material price increases, courts tend to provide some compensation. For example, the Nanjing Intermediate Court held in case (2023) Su 01 Min Zhong 17409 that: The steel involved in the case, as a main material, experienced significant price fluctuations, with the average price increasing by more than 30%, resulting in a significant increase in construction costs, and the fundamental conditions of the contract underwent unforeseeable changes that did not constitute commercial risks at the time of signing. Continuing to perform the contract according to the original agreement would be clearly unfair to the contractor. Based on the actual situation of this case and the principle of fairness, the price should be adjusted appropriately. Some courts also commission appraisal institutions to calculate the portion of the main material price that exceeds the contract risk range, and then order the client to share it appropriately.

Around 2021, many local housing and urban-rural development authorities issued documents providing guidance on abnormal fluctuations in material prices. For example, Shanghai issued a document stating that if the contract stipulates a fixed total price with no price adjustment, and if changes in factor prices constitute a change of circumstances under Article 533 of the Civil Code, both parties should, in accordance with the principles of good faith and fairness, negotiate and sign a supplementary agreement to reasonably share the risks. These policy signals indicate that the administrative level holds a positive attitude towards contract adjustments for extraordinary price increases. However, as mentioned earlier, policy documents themselves cannot force judicial adoption; ultimately, the court must make a judgment based on the specific circumstances of the case.

Practical Points: First, the contractor should consider setting a price fluctuation adjustment clause when signing the contract. For example, it can be agreed that when the fluctuation of the main material price exceeds ±5%, the exceeding part will be adjusted accordingly. Such agreements are legally valid and operable, and can greatly reduce later disputes. Second, when encountering a surge in material prices, timely communication with the client should be made, providing authoritative price indexes, market reports, etc., to prove the abnormal increase, striving for the client's understanding and negotiating a price adjustment to overcome the difficulties together. When claiming a change of circumstances in litigation, it is important to prove the abnormality and persistence of the price increase—for example, providing a price index curve showing that the price during the contract period far exceeds the historical fluctuation range; and proving that continuing to perform at the original price will cause huge losses to the contractor and is clearly unfair. In addition, guidance issued by local governments or industry associations can be cited to prove that this price increase has been recognized by the competent authorities and needs to be alleviated through contract adjustments. In summary, although the difficulty of successfully claiming a change of circumstances is high, the contractor should still actively prepare and take multiple measures to seek redress.

From the above analysis, it can be seen that courts in disputes over fixed-price contracts adhere to a discretionary approach that balances strict adherence to the law and the maintenance of fairness. In general principle, judicial authorities emphasize the strict observance of contracts, respecting the clear agreements made by the parties in the contract regarding risk sharing, and not easily breaking the constraints of the fixed total price. In particular, for general increases in material prices, losses caused by the contractor's own business decisions, etc., courts mostly determine that these are commercial risks to be borne by the contractor themselves, and do not support adjusting the contract price. This orientation ensures contract stability and prevents contractors from arbitrarily repenting afterwards and increasing the burden on the client.

However, on the other hand, construction engineering contracts have a long performance period and complex influencing factors, and a completely absolute "fixed price" can sometimes lead to clearly unfair consequences. Therefore, in special circumstances, the court also shows a certain tendency towards balance and breakthrough. For example, in cases of design changes and significant deviations in the amount of work, which essentially exceed the scope of the original contract, the court almost unanimously supports adjusting the price to prevent unjust enrichment of the client. Furthermore, when force majeure, policy changes, or abnormal price increases cause the foundation of the contract to be significantly shaken, the court will comprehensively consider the applicability of change of circumstances. After the Civil Code came into effect, change of circumstances was written into the law for the first time, providing a clear basis for the court to adjust the contract. Some local courts have made judgments based on this, determining that a change of circumstances has occurred and changing the contract price.

It is noteworthy that there may be slight differences in the specific criteria for discretionary judgment among various courts. For example, the Beijing High Court and Sichuan High Court have issued answers to difficult questions, providing guidance on the proportional calculation of unfinished settlement for fixed-price contracts and reference quota pricing for design changes. These guiding documents have become references for discretionary judgment in local judicial practice. In the central and western regions, there may be a greater tendency to uphold the no-price adjustment clause in contracts in the face of material price increases, in order to maintain investment stability. Overall, while judicial practice has not yet formed a nationally unified set of detailed standards, it is based on the basic principle of "fairness and reasonableness"—preventing contractors from excessively using changing circumstances to evade contractual responsibilities, and also preventing the contracting party from gaining undue benefits due to unexpected events. The risk allocation of construction project payments should adhere to the principle of fairness. When strict contract performance is clearly contrary to fairness, the court has the responsibility to make adjustments within the legal framework.

In terms of judicial outcomes, courts tend to favor limited remedies rather than completely overturning contracts. For example, regarding price adjustments, most judgments involve reasonable changes to the disputed portion, rather than a complete recalculation of the project cost. This is reflected in the principle of "higher not lower" for changes—additional payments are made for increased work, while for reduced work, the original total price is maintained or reduced as appropriate; a certain compensation is given for risks exceeding the scope, while conventional risks are still borne by the contractor.

In summary, judicial practice demonstrates a judicial viewpoint of "unchanged principles, fair adjustments for exceptions" for fixed-price contracts. Judicial discretion in these disputes is influenced by many factors, requiring adherence to legal provisions and contractual agreements, while also using the principles of fairness and good faith to correct imbalances in extreme situations. Therefore, parties in litigation should fully prepare legal grounds and factual evidence to guide judges in recognizing that their claims meet the above discretionary criteria, thereby increasing the chances of winning the case.