Lump Sum Contract Definition
It is defined as a fixed price contract where contractors undertake to be responsible for executing the complete contract work for a stated total sum of money.
A lump-sum contract will require the contractor agreeing to provide specified works for a fixed price. In a lump-sum contract, the client 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 being contracted 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
When to Use Lump Sum Contract Agreement
A lump-sum contract is a great contract agreement to be used if the requested work is well-defined and construction drawings are available. The lump-sum contract will reduce owner risk, and the contractor has greater control over profit expectations. It is a preferred choice when soil conditions are stable, complete pre-construction studies, and assessments are completed and the contractor has analyzed those documents. When agreed-upon partiesThe lump sum type contract may contain, certain unit prices for items with indefinite quantities and allowance to cover any unexpected condition.
The time to award this type of contract is also longer; however, it will minimize change orders during construction.
This is generally appropriate where the construction project is well defined, when tenders are sought, and significant changes to requirements are unlikely. This means that the contractor will be able to accurately price the works they are being asked to carry out.
Advantages Of Lump Sum Construction Contract For The Owner
1. Bidding analysis and selection process is relatively easy.
2.Fixed construction cost
3. The contractor will try to complete the project faster.
4. It is much easier to supervise and manage Lump sum contracts.
5.Low risk to the owner.
6. It is much easier to be approved for a construction loan when you have a lump sum contract. Because it offers assurance in terms of the associated cost.
Advantages Of Lump Sum Construction Contract for The Contractor
1. They are also motivated to try to finish the job faster.
2. There is a big margin for profit realization for contractors as well as designers.
3.Accounting related to lump sum contracts low-intensive that diminishes overhead expenses of the contractor and allow for stable cash flow.
Disadvantages of Lump Sum Construction Contract
1. A lump sum agreement presents a higher risk to a contractor.
2. The Owner might reject change order requests.
3. The project needs to be designed completely before the commencement of activities
4. The contractor will select its own means and methods.
5.Higher contract prices that could cover unforeseen conditions
Variations in Lump Sum Contracts
Lump sum contract allocates high risk to the contractor when compared to some other types of construction contracts because the process of tender preparation is more expensive for the contractor. Therefore, a clear system has to be put in place to address varying conditions during the course construction by adding necessary provisions:
In a lump sum contract, even though the amount of work and its price are well defined, there is always scope for changes or upgrading. To cover these changes, agreements should include terms for contractors to go ahead with such design, material or quantity alteration without having to argue about expenses.
It’s essential that contracts include an efficient variation and valuation process.
2. Relevant events
This may include failure on the part of the client to procure supplies or provide timely instructions to the contractor or those events over which neither party have any control like inclement natural disasters or weather condition. In either case, such clauses should be included in the contracts that provide reimbursement for losses to the contractor.
3. Provisional sum
This is usually applicable in cases where the client may not opt to pay for undefined work. This is why a provisional sum is included in the contract documents as an estimate of the total cost of construction.
4. Fluctuations in Inflation
Provisions should be added to these contracts to suitably compensate contractors in case of inflations on projects especially those which last for a length of time. The reason being tenders are based on current price and contractor should be paid in case of a price change that occurs during the entire period.
Disputes in Lump Sum Construction Contract
Lump sum contracts are suitable for smaller construction projects, they could lead to dispute and claims arising out of contract agreements. The most disputable issues are:
1. Unbalanced Bids
Certain projects need submission of payment applications using unit quantities and unit prices. In such a case, the contractor may create an unbalanced bid by raising unit prices on such items required early in the building process like transportation and insurances & reducing the unit price on materials which have to be used later.
2. Change Orders
In case of change order proposals suggested or received by the client that may demand increased expenses, the rate quotation could lead to disagreements.
3. Changes related to Scope and Design
Based on construction procedures & past experience, the contractor can suggest design changes. Contract provisions should be able to explain how those alterations in the plan will be addressed & who will bear the add-on expenses.
4. Compensation for Early Completion
Lump sum contracts may contain a provision for an early completion compensation for the contractor.
Lump Sum Contract Example
There are several lump sum contract examples in the construction field, examples of lump sum contracts:
- Building a hospital Contract: the client agrees to make a lump sum contract to build a hospital building with a lump sum price.
- Building a residential tower: the client sign a lump sum contract with the contractor to build a residential tower with a fixed price contract
Lump Sum Contract Sample
There are many lump sum contract samples, check them from here