What Is A Lump Sum Contract | Lump Sum Contract Advantages and Disadvantages

What Is a Lump Sum Contract?

A Lump Sum Contract is the oldest form of contract and is still popular in the USA. In this form of contract, contractors are required to quote a fixed sum for the execution of work in all respect.

The whole work is done as per the drawing, design, and specifications supplied to them with the tender within the specified time.

A schedule of rates is also provided to the contractor, to work out the cost of extra items or omissions. A lump-sum contract is usually an “entire” contract and, as such, no payment can be recovered by the contractor until the whole of the work is completed.

In case the contractor abandons the work before completion, he is not entitled to payment for the portion of work already done, however substantial it may be.

Read More: Types Of Engineering Contracts And Their Uses

What Is Agreed in the Lump Sum Contract?

For lump sum contract will require the contractor or supplier to admit to performing or providing the services for a stipulated or fixed price.

In a lump-sum contract, the owner has to give or provide details of all the risk in work to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies.

Under this agreement, a contractor who signed 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 is generally utilized to estimate the material cost, and labor cost and add a specific amount that will cover the contractor’s overhead and profit margin.

The amount of expense under overhead charges will vary from builder to builder, but it will be based on their risk assessment study and labor expertise.

In case of a very high, estimated overhead cost can lead the contractor to present higher construction costs to the project owner.

The experienced contractor is very good at determining how their estimated profit will actually be. A long-run and delayed project will raise construction costs and eventually diminish the contractor’s profit.

When to Use Lump Sum Contract

A lump-sum contract is to be used only when work is well-defined and construction drawings are completed.

This type of contrastable reduces owner risk, and the contractor has greater control over profit expectations.

Sometimes a part of this contract like a stipulated sum contract might contain, when agreed-upon parties, certain unit prices for items with indefinite quantities and allowance to cover any unexpected condition.

The tendering process of these types of tender is also longer; however, it will minimize change orders during construction.

Advantages of Lump Sum Contract

• The owner knows beforehand exactly what the project will cost him.
• Detailed measurements of the work done are not required to be recorded except in respect of extra items or omissions.
• As whole details of work are available from drawings and also the total cost of work is known beforehand, excellent planning and efficient management for execution of work are more convenient.
• As no intermediate payment is made to the contractor, he tries to complete the entire work as quickly as possible to get early payment resulting in early completion of the work.

Disadvantages of Lump Sum Contract

• Under such a contract it is essential that the work is accurately and completely shown on the drawing and described in the specifications and that full information is available on site also, otherwise dispute can easily arise.
• The contractors may deliberately submit high tenders to protect themselves from the uncertainties of the work.
• The difficulty arises in making any intermediate payment: generally, a certificate is given by a responsible officer to the effect that, by superficial or general measurement, he has satisfied himself that the value of the work is not less than a specified amount in conformity with contract agreements.
• Although a schedule of rate is provided to the contractor, it is not a suitable form of contract where considerable addition or alteration is expected.

Read More: What Is Construction Contingencies And Why It Is Required?

Important Matters of Dispute in Lump Sum Contract

A lump-sum contract is one of the popular contracts for small project or work contract, there is some important point that can lead to dispute.

1. Unbalanced Bids:

Some projects are required to submit pre-payment applications by filling in details like unit quantities and unit prices.

Sometimes, many contractors try to create an unbalanced bid by raising unit prices on such items required early in the building process like transportation and insurance, and decreasing the price of materials, which are required later.

2. Change Orders:

If, there is any change in order or work proposals received by the owner during work. The contractor may demand increased expenses; the rate quotation could lead to disagreements.

3. Changes related to Scope and Design:

As part of a lump sum work contractor who is well experienced and has a well past experience can suggest a change method or design.

The contract should agree on such a situation and it must 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:

The Lump-sum contract may include compensation for the contractor for early completion of work.

Lump Sum Contract Risks

For contractors, a lump sum contract, or a stipulated sum contract, is one of the most used types of contracts drafted in the construction industry because they are pretty straightforward.

The contractor and project owner generally rely on a lump sum for less complex projects with a clearly defined scope of work.

This type of contract allows work or services to be agreed upon and performed for a single price, unlike contracts like the cost-plus.

Despite the simplicity of this contract, there are some potential risks to the contractors that should understand.

 1. Increased Risks

It is very clear when contractors take the lump sum contract, it will carry much of the risk. If there are changes in work and expenses outside of the agreed fixed price, the contractor is responsible for those costs.

That’s why it is very important for the contractor to estimate the overall cost and profits and execute the project seamlessly in order to classify a project as successful.

2. Lien Waiver Issues

Sometimes, a dispute could arise if contractors submit statements of payment to the owner without actual payment amounts listed.

Technically, the Contractor has no need to show owners their accounting detailing how much subcontractors have been paid; however, this could be an issue for owners.

On another side, project owners will want to correct their own interest against a lien against their properties and will want to know every party on the project as well as when and how much they are paid to secure themselves against the alien.

3. Engineering Costs

If contractors don’t thoroughly read their payment contracts, this might cause unexpected costs that relate to the work they hire subcontractors to perform on a project.

Without standard architectural and engineering approval clauses drafted into the contract, the contractor is often stuck paying thousands of dollars to possess drawings examined and stamped by another engineer.

Lump sum contracts have many advantages and may still work for contractors, they only require strict management.

Contractors should even have the contract reviewed by a knowledgeable Fort Lauderdale construction attorney to make sure it’ll not go from a payment agreement to a way costlier arrangement.

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