Because no two construction projects are alike, there are and several types of construction contracts (Lump Sum contract, cost-plus contract, etc.) available to meet the needs of all parties involved. Knowing which contract is ideal for the project helps owners, contractors, and suppliers manage risk and ensure that work and payment move as smoothly as possible.
What is a lump sum contract?
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/agreement will require the contractor to agree to provide specified works for a fixed price. In this type of 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 lumpsum contract agreement will be responsible for the proper job execution and will provide its own means and methods to finish the work
When to Use Lump Sum Turnkey Contract Agreement?
A lump-sum contract is a great agreement to be used if the requested work is well-defined and IFC construction drawings are available. The lump-sum agreement will reduce client risk, and the contractor has greater control over profit expectations.
A lump sum is preferred when there is a stable soil condition, complete pre-construction studies, and assessments are completed and the contractor has analyzed those documents. When agreed-upon parties The 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 a lump-sum 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.
Lump sum pricing
Because a lump-sum turnkey contract features one overall fixed price, without taking into consideration of the actual costs, the contractor had better get that price right. The sum comes from comprehensive plans, detailed construction specifications, and a little bit of trust.
Successfully using a lump sum contract means properly anticipating the project’s time schedule, all material, and labor costs, as well as knowing how much to build into the price for a fair profit margin and overhead costs. What’s more, that contractor had better be sure that the client won’t be trying to call for changes throughout the project life cycle.
Advantages of Lump Sum Contract For The Owner
1. The bidding analysis and selection process are relatively easy.
2. Fixed construction cost
3. The contractor will try to finish the project faster.
4. It’s much easier to manage and supervise Lump sum contracts.
5. Low risk to the owner.
6. It’s very easy to be approved for a construction loan when you have a lump sum agreement.
Advantages of Lump Sum 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. A lump sum agreement accounting related to low-intensive that diminishes overhead expenses of the contractor and allows for stable cash flow.
Disadvantages of Lump Sum Construction Contract
1. A lump sum contract agreement presents a higher risk to a contractor. That’s why the lump sum contract contractor is a risk-taker.
2. The Owner might reject change order requests.
3. The project requires to be fully designed before the activity starts
4. The contractor will select its own methods
5. Higher contract prices that could cover unforeseen conditions
Lump Sum Contract Variations
Compared to some other types of contracts, the lump sum agreement allocates high risk to the contractor because the contract preparation method is more costly 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:
Although the amount of work and its price are well defined, there is always scope for modifications or upgrades in a lump sum contract. Agreements should include conditions for contractors to carry out such design, material, or quantity changes without having to argue about costs to cover these modifications. It’s important 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 providing the contractor with timely orders or those occurrences that are not controlled by either party such as inclement natural disasters or weather. In either case, such clauses should be included in the contracts that provide reimbursement for losses to the contractor.
3. Provisional sum
This is applicable in cases where the client may not opt to pay for undefined work. That’s why the contract documents include a provisional sum as an estimate of the total construction cost.
4. Fluctuations in Inflation
Provisions should be added to these agreements in order to adequately compensate contractors for project inflation, particularly those that last for a long time. The reason for tenders is based on the current price, and in the event of a price change that happens throughout the period, the contractor should be paid.
Disputes in Lump Sum Construction Contract Agreement
Lump-sum contracts are suitable for smaller construction projects and may result in disputes and claims resulting from contractual agreements. The most disputed problems are:
1. Unbalanced Bids
Some projects must submit requests for payment using amounts of units and prices of units. In this case, by raising unit prices on such items required early in the building process as transportation and insurance, the contractor may make the bid to be unbalanced and reduce the unit price on materials 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
The contractor may suggest modifications in design based on construction processes and previous experience. Contract provisions should be able to explain how those alterations in the plan will be addressed and who will bear the add-on expenses.
4. Compensation for Early Completion
Lump-sum contracts may include a provision to compensate the contractor for early completion.
Lump Sum Contract in Construction
Construction contracts can be more complex than they seem, especially when something goes wrong as part of the process. One of the most commonly used types is the lump sum construction contract agreement.
They may include some kinds of contingencies or allowances, but they generally include payment of one lump sum agreement for one completed scope of work. While these lump-sum contracts may seem simple at first glance, complications can develop later on.
Lump Sum Contract Example
In the construction sector, there are several examples of lump-sum contracts, examples of lump-sum construction contract agreements:
- Construction of a hospital contract: the client agrees to create a lump sum contract to construct a hospital building with a lump sum cost.
- Construction of a residential tower: the client signs a contract with the contractor for the construction of a residential tower with a fixed price contract
There are many lump sum contract examples, download free lump sum contract template samples below.
Lump Sum Contract Sample
There are many lump sum contract samples, check them from here