949

MODEL FOR LEGAL PRINCIPLES OF COMPENSATION FOR ERRORS

IN BILLS OF QUANTITIES: A LAW AND ECONOMIC
ANALYSIS
S. Ping Ho
1
and Chun-Wei Tsui
1

1
Associate Professor, Construction Management Program, Dept, of Civil Engineering, National
Taiwan University, Taipei, TAIWAN. Email: spinghofamu.edu.nv
PhD Candidate, Construction Management Program, Dept, of Civil Engineering, National
Taiwan University. Taipei, TAIWAN. Email: d93521007/g.ntu.edu.tw
ABSTRACT
Due to their complexity, construction contracts frequently encounter contract modification
disputes, especially, the compensation claims for errors in the bills of quantities under lump sum
contracts. The prevailing standard contract forms such as J oint Contracts Tribunal's Standard
Building Contract with Quantities (J CT SBC/Q) often contain provisions for the adjustment of the
lump sum price if there are errors in the bills. However, undesirable outcomes are often observed
under current practice. By developing a game theory model, this paper investigates the contracting
parties* strategic interactions and analyzes the differential efficacy of alternative legal principles
of compensation for errors. Based on this model, we derive the legal principles that may rcduce
opportunism incentives and minimize transaction costs. The principles suggest that claims for error
compensation should pass the test that the errors are not obvious ex ante to the eyes of
professionals. Prevalent standard forms under which the compensation is granted regardless of the
nature of errors violate the derived principles and deserve further investigation.
1. Introduction
The lump sum contract is probably the most common type of contract used in the construction
industry. It is often applied to government projects (Keyes 2004). A lump sum contract giving the
selected contractor an incentive to limit costs may be an optima] contract (McAfee and McMillan
1986).
Under the lump sum contract, the plans and specifications are prepared by the project owner,
usually via the architect/engineer (A/E), in advance of invitation to bid. Subsequently, the value ol'
the various work items is to be established through bidding procedure. The sum of all the values to
be paid shall be fixed as the price stated in the contract. Even if additional works are encountered
during the course of performance, the lump sum price in its original spirit will not be adjusted. This

1 Problems of Contract Modifications and Quantity Differences under Construction
Contracts
2.1. Enforceability of Contract Modification That Grants Additional Payments
The issue on additional payments for quantity difference of the construction contract is relevant to
the contract modification law. In light of the traditional common law, pre-existing duty rule
governs the enforceability of the modification of contract. The Rule provides that modifications of
a contract not supported by fresh consideration' would be unenforceable such that extortion or
coerced modification would not be encouraged (Patterson 1958). A promise to make additional
payment for which the promisee is already under the original contract to do is without consideration,
cxamplificd in the leading judgment from the British High Court in Stilk v. Myrick, 170 E.R. 1168
(1809). However, there have been many exceptions developed by
950 CONSTRUCTION RESEARCH CONGRESS 2010

is the interpretation derived from the Inclusive Price Principle of English Law (Wallace 2004).
Unfortunately, things in practice are not as simple as that in principle. Specifically, the
documentation of a lump sum contract may include a set of bills of quantities, prepared by quantity
surveyors to prescribe the details of particular work items with quantities. Errors or omissions
often exist in the bills of quantities for construction projects (Adrian 1993). The contractor
accordingly requests contract modification and additional payments for the errors while
discovering the errors during, the course of performance. The prevailing standard contract forms
nowadays, for example J CT SBC/Q. often contain provisions for the adjustment of the lump sum
pricc if there arc errors in the bills. Any error or omission in the bills shall be corrected and deemed
to be a variation. In other words, the owiier under .ICT SBC/Q should compensate the contractor
for the quantity difference due to errors in the bills. The result is opposite to the Inclusive Price
Principle.
As such, it remains to be an extremely controversial puzzle of whether under a lump sum
contract, the contractor should be granted remedy for discrepancy between the quantities stated in
the bills and the as built quantities. If the owner subsequently agreed to increase the fixed price due
to the quantity difference, when may the modification be justifiable and enforceable? A variety of
theories and practices keep competing with one another on this issue.
Economic analysis evaluates legal rules by the structure of incentives they established and the
consequences of people altering their behavior in response to those incentives (Friedman 2000).
Comparing among the various equilibrium behaviors of the owner and bidder respectively under
different legal rules enables us to assess those effects of the laws from the standpoint of economic
efficiency. From the perspective of law and economics, we develop in this study a refinement of the
contract modification rules that address issues on quantity differences under construction
lump-sum contracts. The contracting parties* strategic behaviors under alternative modification
rules are to be examined in our study.
In section 2, we go through a brief discussion of the problems of contract modifications and
quantity differences under construction contracts in order to highlight significance of the issues
addressed in this paper. Section 3 describes the model and analyzes equilibrium strategies of
contracting parties under alternative legal rules. Section 4 draws conclusions and shows the optimal
legal rule that governs the contracting parties' strategic behaviors in dealing with potential errors in
the bills. Our analysis concludes that the contract modification rule under which the enforceability
of a promise to pay additional amounts for errors in the bills of quantities is contingent upon the
nature of the errors can discourage opportunistic behaviors between the contracting parties and
achieve economic efficiency.
some courts lo circumvent the pre-existing duty rule. For example, contract modifications may be
held enforceable because of mutual rescission, waiver, additional consideration, unanticipated
circumstances, economic duress, and so on (Graham and Peirce 1989).
In addition, there is even statutory erosion of the pre-existing duty rule. Article 2-209 of
the US Uniform Commercial Code provides that an agreement modifying a contract within this
Article needs no consideration to be binding. Ilie official comment states that modification made
thereunder must meet the test of good faith imposed by this Act. The effective use of bad faith to
escape performance on the original contract terms is barred, and the extortion of a modification
without legitimate commercial reason is ineffective as a violation of the duty of good faith. In other
words, a legitimate commercial reason and good faith may constitute the legal basis for the
enforceability of contract modification in disregard of the lack of fresh consideration.
Furthermore, the Restatement (Second) of the Law of Contracts 89 also provides an
exception for the preexisting duty rule. A promise modifying a duty under a contract not fully
CONSTRUCTION RESEARCH CONGRESS 2010 951

performed on either side is binding if the modification is fair and equitable in view of
circumstances not anticipated by the parties when the contract was made.
It appears that the pre-existing duty rule has been undermined in a general sense. Nonetheless,
the question whether those legal terminologies substituting the preexisting duty rule, like
extortion, good faith," economic duress, opportunistic threat," and so on, can be given a
meaningful and objective definition still remains unresolved. The legal principle needs to be
further refined for the specific type of contract and issue.
2.2. Debates on Remedy for Errors in Bills of Quantities
As introduced in the previous section, the major standard forms grant the contractor a special
remedy for errors in the bills. For example, the J oint Contracts Tribunal's Standard Building
Contract with Quantities (J CT SBC/Q) is one of the most common standard contracts used in the
construction industry of UK and also adopted by international contracting parties in many other
countries. In principle, the contract price is set on a lump sum basis with monthly interim payments.
The owner at the stage of tender provides the contractor with drawings and bills of quantities. The
price data filled by the contractor in the bills of quantities are mainly for the purpose of valuing
variations. The owner and contractor are equally bounded by the rales staled
in the bills of quantities once the contract is concluded (Rycroft and Ndekugri 2002).
Clause 2.14.1 of J CT SBC/Q directs that if in the Contract Bills.... there is ...any error in
description or in quantity or any omission of items..., the departure, error or omission shall not
vitiate this Contract but shall be corrected so that it does provide that information. Clearly, J CT
SBC/Q grants compensations to the contractor for the errors in the bills of quantities, despite of the
nature of errors in the bills. The contract modification of additional payment agreed by both parties
is justifiable and enforceable under J CT SBC/Q. It is widely accepted among scholars and
practitioners that the owner should be obligated to prepare the bills of quantities in accordance with
standard method of measurement. It should be the owner's responsibility for (he accuracy of the
bills. The owner should assume the risk of its errors in bills of quantities.
Nevertheless, the opposite opinion claims that a requirement to use a standard method docs
not thereby constitute a warranty of accuracy of the bills (Thomton 2007). Traditionally, by the
virtue of lump sum, the total price of lump sum contract cannot be altered, except for variations of
the project occurring during the course of the performance. Any contractual documents showing
work items and unit prices exist merely for the purpose of valuing such variations. Any bills of
quantities found in association with lump sum contracts have no legal effect beyond their use in the
valuation of variations and, in some cases, as a basis for interim payment. Indeed, such bills may
not even perform these functions, and may simply be used as a guide issued to bidders in the tender
phase so as to reduce the time and expense of the estimating proccss required to arrive at the Lump
Sum." In an old English jargon, such bills do not form part of the contract, and the contract
remains essentially a Lump Sum contract (Wallace 1975).
Wallace further explicated that claims brought by the contractor for errors in the bills are
essentially without merit, because either (a) the contractor has noticed the error' in the Bills when
pricing, and if he intended to claim was stealing a march on both the employer and his competitors
in tendering an apparently lower price or (b) he has not noticed the *crror\ in which ease his priccs
will in any event have included for the process or contingent expenditure involved. He suggested
that the successful bidder should be contractually obliged to disclose the detailed make-up of its
tender priccs before the contract is signed such that bills of quantities could perform the function of
permitting an accurate comparison of tenders, or precise measurement or valuation of variations or
interim payment (Wallace 1975).
952 CONSTRUCTION RESEARCH CONGRESS 2010

However, even if the contract law imposed compulsory obligation on the contactor to disclose
the detailed make-up, those figures would be easily manipulated and distorted if the contractor's
incentive of exploiting its private information was not properly removed. Practically, such a
proposal might not be able to properly resolve the problem.
Basically, the bills of quantities are intended to be simply a guide to allow the price to be
determined. Mistakes in the bill descriptions or quantities are unlikely to be remedied as a legal
rectification of the contract to reflect the true intention of the parties. It is more likely than not. that
the common intention will be that the tendered pricc should prevail, rather than a price revised to
account of the errors (Atkinson 2000). Therefore, the contractor's obligation to perform the whole
work for the lump sum price will disentitle him from claiming additional payment for increases in
the quantities (Dorter 1991). Given the early precedents of England, contractors would diligently
peruse contract terms prior to executing a lump sum contract and ensure that their rights and
obligations are clearly spelt out (Xavier 2002).
Thomton further explored the Inclusive Pricc Principle of English law introduced in the
authoritative textbook, the 1 l
,h
edition of Hudson's Building and Engineering Contracts. The
principle provides that work that is indispensably or contingently necessary for completion should
have been included within the contract price. Since for most construction contracts, there would
always be some element of uncertainty about the extent of work and the final price prior to
completion of the work, the design process would never have been fully completed at the time the
contract is made. Therefore, any indispensable or contingent work must be carried out at the
contractor's own expense and will not qualify for additional payment (Thornton 2007). Thornton
tried to argue the irrationality of passing the risk of paying for unascertained indispensably or
contingently necessary work onto the owner. However, he drew the conclusions without giving
clear analysis to the distribution of risks. Especially* the inefficiency led by the owner's strategic
behavior did not obtain substantial consideration.
2.3. Bidding Strategic Behavior
Contractors are potentially able to enjoy greater profits from unbalanced bidding although it is also
possible that it may give cause for them to incur additional risk. Contractors have the advantage
over owners in this regard by having available to them their own private information about their
estimates of a projects cost. Owners do not have access to this same information, which makes it
far more difficult for them to determine the existence and the extent of any possible loading in any
item prices.
One of the methods of unbalanced bidding was to exploit errors in the planned quantities. A
contractor having done a field investigation might discover that quantities of some items during
construction will exceed the estimates in bills of quantities. This contractor would benefit if they
were to load up the prices of those underestimated items, and load down the prices of others, in
which it could still win the contract with the same tendering bid (Cattell, Bowen et al. 2007).
Some claimed that the bidders exploitation of its private information of production volume
need not cause losses to the owner because a correct bid, based on correct volumes specified in the
bills, would have reflected a higher bid price (Missbauer and Haubcr 2006). Others proposed a
procedure to adjust the unit prices offered by the winning bidder for managing the unbalanced bids
(Wang 2004). However, the very information asymmetry between the owner and contractor results
in rent seeking behavior with net costs and, thus, economic inefficiency. The efficiency cannot be
attained unless the applicable rule provides the parties with appropriate incentive to move. This
reality should not be overlooked.
CONSTRUCTION RESEARCH CONGRESS 2010 953

As such, our prime issue of concern is the consequences of relevant legal rules and the
efficiency of risk allocations. We focus on the ex ante incentive and bidding strategic behavior of
the parties under alternative contract modification rules. A theoretical game model is developed lo
evaluate the cfficacy of the contractual rules.
3. The Model
However, as we will analyze in the following sections, the contractors opportunistic behavior can
be encouraged under the provisions of J CT SBC/Q. On the other side, the Inclusive Price Principle
may not achieve efficiency and minimize transaction costs at the stage of contract tendering.
3.1. Setup of the Game
Consider an owner who is developing a construction project under the traditional procedure of
procurement and engages the A/E in producing the tendering documents.
including drawings, specifications and bills of quantities that itemize the detailed project works.
Inevitably in practice, there is always possibility that an error of quantity deficiency for any speclllc
work item exists in the bills of quantities. If the owner wants to lessen the deficiency, the higher
cost needs to be invested in the design management. Otherwise, the owner may use the lower
efforts in design management and allow the greater deficiency in the bills of quantity.
Subsequently, the owner publishes the tender documents and invites bidders to bid for the
contract. The lump-sum price scheme is lo be applied for all the works to be performed under the
contract. Bidders are required to allocate and submit the unit price for each work item described in
the bills of quantities. Bidders build up the total price of their own bids based on the unit prices
times quantities (Wang 2004).
In practice, an experienced contractor will conduct a basic procedure for bid preparation prior
lo submitting its bid, including examination of the drawings, specifications and bills of quantities
provided by the owner, site visit, calculation of the bid price, and so on. Some errors in the bills of
quantities may be discovered by the bidder through such basic procedures for bid preparation; thus,
the owner estimated quantities arc inconsistent with those taken off by bidders. We call such an
expected difference the obvious error, which is professionally noticeable by experienced
contractors from their basic bid preparation. Otherwise, if the owner estimated quantities are exactly
consistent with those tnken off by the experienced
contractor from the basic bid preparation, the discrepancy between the estimated and actual
quantily, is considered as the latent error, which is not professionally noticeable by experienced
contractors from their basic preparation, and entails further detection to be discovered in addition to
the examination in the basic bid preparation process.
With the private information of the quantity deficiency, the bidder chooses to either reveal
whatsoever discovered or use unbalanced bidding strategy. While revealing those errors discovered,
the bidder requests the owner to correct the deficiencies, in which the quantity of the specific work
item in the bills will be modified and the lump sum price will be adjusted accordingly. The
adjustment involves in a re-examination process of the bills of quantities, in which a cost is to be
incurred by the owner.
Alternatively, while concealing whatever errors discovered, the bidder uses unbalanced
bidding strategy and attaches to the underestimated work item a skewed unit price, rather than the
bidders actual unit cost.
Finally, during the performance of the contract, the contractor will reveal any and all the
errors, which have not been corrected before contract awarding, and request contract modification
compensating for those quantity deficiencies.
954 CONSTRUCTION RESEARCH CONGRESS 2010

As such, this article uses a simple theoretical model to evaluate the various legal rules: when
is the contract modification that compensates for errors in the bills of quantities justifiable? We first
focus on obvious errors in section 3.2, and then tum to latent errors in section 3.3. We shall compare
the effects of different legal rules on the strategic behavior of the owner and bidders and the
corresponding transaction costs incurred by both parties in preparing or examining the bills. This
analysis aims to derive the contractual rule under which the opportunistic behavior may be
eliminated and the transaction cost minimized.
3.2. The Obvious Errors
In this section, we address the obvious errors possibly existing in the bills of quantities, which may
be discovered through the basic procedure for bid preparation.
First, attention is given to the parties* equilibrium behaviors under which the legal rule
allows contract modification that compensates for errors in the bills. For instance, J CT SBC/Q
provides that errors will be corrected and treated as variation in the execution of project. To put it in
other words, the contract modification due to the existence of errors in the bills may be justifiable
and expected when the errors are discovered during the course of performance. The contract price
should be increased in accordance with the unit price previously broken down by the bidder and set
forth in the contract documents.
The owner determines the level of efforts invested in the design management, in which a cost
is incurred by the owner. The bidder chooses from: (1) concealing the obvious errors discovered
and submitting unbalanced bids, or (2) revealing the obvious errors and requesting correction.
Because the legal rule grants compensation to the contractor for obvious errors in the bills of
quantities, the bidder has an incentive to exploit their private information for seeking extra profit
from the compensation. To conceal obvious errors discovered and to submit the unbalanced bid
evidently is the strictly dominant strategy of bidders.
Given the bidder's strategy, the owner will choose a level of effort in the design management
to minimize its total expenses on the project. However, the First-best condition which requires the
owner expending nothing in the design management cannot be accomplished. Moreover, the
opportunistic behavior of bidders to exploit their private information cannot be completely
eliminated. Given any level of the owner's cost for design management, bidders have no incentive
to disclose whatever obvious errors discovered through the basic procedure for bid preparation.
Bidders always attempt to submit unbalanced bids and subsequently claim for modification of the
contract price during the performance of work. The owner faced with the claim has difficulty to
demonstrate that the unit price previously quoted by the contractor was manipulated and skewed
since die bidder's cost structure is unverifiable. Therefore, such kind of claim would incur
significant dispute costs and jeopardize the cooperative relationship between the owner and
contractor. The opportunistic behavior may even impede future transactions and result in economic
inefficiency.
Second, we now turn to the legal rule forbidding contract modification that compensates for
errors in the bills. Similar to the Inclusive Price Principle, the contractor is not entitled to
compensation for quantity differences due to the errors in bills. If bidders did not reveal the errors
and requested for correction before submitting their bid, they shall take full risks relating to the
accuracy of work quantities once both parties have signed the contract. In other words, the court
sticks to the pre-existing duty rule, in which contract modification does not justify itself under Uie
Inclusive Price Principle. The existence of errors in the bills does not create any fresh
consideration.
Thus, the bidder will suffer a significant loss from choosing to concealing obvious errors
discovered and submit the unbalanced bid without obtaining compensations after completion of
CONSTRUCTION RESEARCH CONGRESS 2010 955

project. Submitting unbalanced bids does nothing good to the bidder. Therefore, it is the bidders
strictly dominant strategy at the tendering stage to reveal whatever errors discovered and request
rectifying the underestimated quantities.
On the other side, the owner tends to reduce the efforts and the contract quality since the
owner need not compensate for any errors in the bills of quantities. Notwithstanding, the effort level
injected by the owner in design management will not decrease loo significantly although. Whenever
bidders bring ihe request for correction of the bills, the owner incurs a cost in relation to
re-examining the bills of quantities, which is increased by any decrease of the owner's effort in the
design management. The lower the efforts in design management used by the owner, the higher the
rectification cost incurred.
Accordingly, the owner will choose the level of its design effort at which the cost in correcting
the obvious errors may be balanced. At the same time, the decision of the owner will be optimal and
satisfy the first-best condition. Most of all, this rule completely eliminates the incentive for bidders
to exploit their private information and use unbalanced bidding strategy. In addition, this model
induces the owner to use the optimal level of efforts in the design management.
To end this section, it can be found that the legal rule forbidding contract modification that
compensates for errors in the bills delivers bidders an ex ante incentive to reveal obvious errors
discovered through their basic process of tender preparation and request rectification before
submitting the bid. The owner accordingly will use its optimal effort in the design management, in
which the total cost of transaction is minimized. Therefore, the greater net gain and efficiency may
be achieved by distributing the risk of obvious errors to bidders and forbidding the contract
modification.
3.3. The Latent Errors
Following the same framework for analysis as the previous subsection, we first address the parties'
equilibrium behaviors under the legal rule that allows contract modification that compensates for
latent erTors in the bills.
In order to discover those latent errors and submit unbalanced bids, the bidder needs to
conduct further investigation in addition lo its basic process of preparation for the bid. Otherwise,
the bidder may choose to simply submit the balanced bid without expending in further investigation
of latent errors.
As is usually the case when the minimum effort to be used in detecting latent errors is greater
than the excess profit obtained from unbalanced bidding, taking unbalanced bidding strategy cannot
be worthwhile. The additional cost may be too significant for bidders to detect the latent errors for
using unbalanced bidding strategy. There is no chance for bidders to take advantage of the owner.
Under such circumstance, (he legal rule that allows contract modification that compensates errors in
the bills of quantities brings bidders no incentive to use unbalanced bidding strategy. Given bidders'
strategy, the owner will expend nothing in the design management, and the first-best condition may
be satisfied as well.
To evaluate, the legal rule that allows contract modification that compensates errors in the
bills of quantities cannot induce bidders to expend more in detecting latent errors in the bills.
Although the latent errors cannot be discovered and corrected at the tendering stage, the owner will
subsequently compensate the contractor the exact cost overrun for the erred work item, and no extra
profit will be sought by the contractor. In addition, this appropriate amount of compensation
provides the owner with an incentive to invest at the efficient level of reliancc (Miceli 2002). As a
result, the total cost of the transaction may be minimized under such a rule.
Second, under the legal rule forbidding contract modification that compensates for errors in
the bills, the bidder has two choices: (1) to expend in further investigation of latent error and
956 CONSTRUCTION RESEARCH CONGRESS 2010

request correction before submitting the bid, and (2) to simply absorb the cost for the deficiency
without expending additional efforts in discovering latent errors. In order to avoid taking the risk of
cost overruns, the bidder will choose to invest in detecting latent errors and request modification of
the bills at the tendering stage.
On the other side, the owner considers whether to invest design management efforts in
reducing latent errors so as to balance the cost incurred in correcting the bills upon the bidder's
request. When the minimum effort to be used is loo significant, the owner will simply choose to
expend nothing in managing latent errors but awaiting the bidders request for correction.
From the long-term point of view, the contractor, however, will incorporate into the
lump-sum price a premium that quantifies the risk of latent errors in bills of quantities. The owner
will have to pay a higher price in order to have the contractor bear the risk of difference in work
quantities. The uncertainty will impede potential transactions and cause further loss of efficiency to
the industry.
Moreover, having predicted bidders' behavior, the owner might consciously create, by itself
or via the designer, latent errors in the bills. The opportunism on the side of the owner shall also be
taken into account, especially in which the potential errors faced by the parties are latent. As
Browning and Cohen pointed out, for the culture of construction industry, especially under the
lump sum price scheme, not only is the information on which the contractor is to base his price
inadequate but the client then seeks to transfer as much of the risk as possible onto the contractor"
(Browning and Cohen 1998). It is implied that the strategically rent-seeking behavior of
contracting parties is so real and evident. There may be an incentive for the owner to skew the bills
and to specify work quantities that arc different from the values actually estimated (Missbauer and
Hauber 2006). Insisting on the Inclusive Price Principle while addressing latent errors in the bills of
quantities may result in the owners strategic distortion of the bills and, thus, inefficient allocation
of resources. Instead, enforcing the compensation for the latent errors may economize on the
transaction costs and maximize the total gain of both parties.
To conclude, enforceability of contract modification that compensates for errors in the bills
shall be contingent upon the nature of the errors. Bidders shall be compensated for the errors in the
bills, provided, however, that the errors have been found to be latent. The economic efficiency may
be achieved by applying such a contingent legal rule.
4. Conclusion: A Contingent Contractual Rule
As argued by Rookc, Seymour et al., while the bidders opportunistic behavior can be seen as a
rational response to the underlying profit and economic conditions in this industry, such
interactions have been embedded in the culture (Rooke, Seymour et al. 2004). The inefficiency
arising from opportunism in the construction industry is such conspicuous and significant.
Therefore, it is vital to examine the relevant institutions, which influence human interactions and
the resulting transaction costs. Our objective is to analyze the strategic behavior of the owner and
bidder in response to different contractual rules that determines the additional compensations for
errors in the bills under lump sum contracts, and then evaluate the economic efficiency of the rules.
Eventually, efficiency may be realized when circumstances provide sufficient incentive for those
with bargaining strength to alter institutions in the efficient direction (North 1990).
This paper concludes that the contract modification rule under which the enforceability of a
promise to pay additional amounts for errors in the bills of quantities is contingent upon the nature
of the errors can discourage opportunistic behavior between the contracting parties. We
conceptualize the errors in the bills into two categories: obvious and latent errors. From the
CONSTRUCTION RESEARCH CONGRESS 2010 957

standpoint of economic efficiency, we show that a contingent rule under which contract
modification compensating for errors in the bills is justifiable only if the errors are latent
discourages opportunistic behavior of the parties without causing inefficient transaction costs. If
the contractor conceals the obvious errors in the bills of quantities without requesting correction
before submitting its bid but claims compensation for the errors during the performance of contract,
then the claim for compensation is unjustified. A promise of the owner to pay additional amount
therefor may be presumed to be a coerced modification and is unenforceable. Instead, if the
contractor discovers the latent errors during the performance of contract, then the contract shall be
modified to compensate the contractor for the errors at the rate of charge incorporated into the bills
of quantities.
On the one hand, forbidding contract modification compensating for the obvious errors
eliminates the incentive for bidders to do unbalanced bidding. Bidders will be induced to truthfully
report to the owner for rectification without exploiting its private information. At the same time,
the design quality would be preserved at the optimal level of the owner. Otherwise, allowing and
enforcing the contract modification compensating the bidder for the obvious errors in the bills
induces bidders to submit unbalanced bids and leads to a relatively high design cost incurred by the
owner in response to bidders* opportunistic behavior.
On the other hand, while the errors existing in the bills are latent, allowing and enforcing the
contract modification that provides compensation to the contractor prevents the owner from
manipulating the bills of quantities and causes none of the parties to expend unnecessary costs in
examining the bills. Neither party w
r
ould be worried about the opportunistic behavior that might be
adopted by the other party. As a result, the contingent rule under which contract modification
compensating for errors in the bills is justifiable only if the errors are latent may achieve efficiency
by discouraging opportunism and minimizing transaction costs.
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