Lump Sum Contract
A lump sum contract, sometimes called stipulated sum, is the most basic form of agreement between a contractor and a customer. A lump sum contract or a stipulated sum contract will require that the contractor agree to provide specified services for a stipulated or fixed price. In a lump sum contract, the owner has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies. A contractor under a lump sum agreement will be responsible for the proper job execution and will provide its own means and methods to complete the work. This type of contract usually is developed by estimating labor costs, material costs, and adding a specific amount that will cover the contractor’s overhead and profit margin. If the actual costs of labor & materials are higher than the estimate, the profit will be reduced. If the actual costs are lower, the contractor gets more profit. Either way, the cost to the owner is the same. A lump sum contract is suitable if the scope & schedule of the project are sufficiently defined to allow the contractor to fully estimate project costs.
Unit Price Contract
In a unit price contract, the work to be performed is broken into various parts, usually by construction trade. This contract type is based on anticipated quantities of items which are counted in the project in addition to their unit prices. The final price of the project depends upon the quantities required to carry out the work. For example, painting is typically done on a square foot basis. Unit price contracts are seldom used for an entire major construction project, but they are frequently used for agreements with subcontractors which involve accurate identification of different types of items, but not their numbers, in the contract documents. They are also often used for maintenance & repair work.
Cost Plus Contract
The cost-plus contract is an agreement which involves the buyer’s consent to pay the complete cost for material and labor in addition to the amount for contractor overhead & profit. This contract type is favored where the scope of work is highly uncertain or indeterminate in addition to the types of labor, material, and equipment being similarly uncertain in nature. Here, the contractor’s profit is set at a fixed amount. If actual costs are lower than the estimate, the owner keeps the savings. If actual costs are higher than the estimate, the owner must pay the additional amount. The advantage of a cost-plus contract is that generally speaking, the project will result in the building that was envisioned, even if costs run high. The builder is less likely to cut corners or argue for less expensive materials because his profit is not in jeopardy.
From cost plus benefits is that it’s more transparent than a lump sum contract. However, cost-plus contracts will involve more accounting & reporting than a lump sum contract, and will often require an audit to confirm that the amount of the fee is accurate.