A lump sum contract is an agreement between parties that binds the contractor to offer a single price to execute all the work stated in the contract.
A construction lump-sum contract is very helpful when the work is well defined and require minimum alterations during execution.
In this article, you can understand the basics of the lump sum construction contracts, types of contracts, components, variations, advantages, and disadvantages.
Table of Contents,
What is a Lump Sum Contract Definition?
The definition of the LumpSum Contract is to agree on the fixed price to complete the execution of activities stated in the contract.
So, the meaning of a lump sum contract in construction for contractors is to undertake the responsibility to execute all the work in the stated total sum of money.
Further, the example of a lump sum contract doesn’t include any breakdown of charges for individual activities. Thus, the lumpsum contract is a final pdf document of the negotiating between parties.
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What is Lump Sum Contract Construction?
A lumpsum contract in a construction project is also referred to as lumpsum contract construction. It’s an agreement between parties. So, the contractor agrees to complete the stated work for a fixed price.
Thus, the client focus on assigning all the risks related to working to the contractor. So, it is important for being a contractor to understand lump sum contract risks and lump sum contract payment terms.
Therefore, the contractor takes advantage of the lump sum contract to ask for higher markup to cater to the unseen potential contingencies and risks of the project.
So, a contract of lumpsum contract example held contractor responsible for completion of the job by its means and methods.
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Further, it is important to understand all the terms of the Lum-Sum agreement for its effective use. Thus, we recommend to must read the complete article carefully.
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Importance of Lump Sum Contract in Construction
The importance of lump sum contraction construction is understandable because of its use. As the work in construction projects is well defined.
Also, usually, the clients have drawings and BOQ of work before asking for bids and tenders. Thus, it is useful as the work is well defined and the client reduces all of its risks.
While the contractor already understands the details of work and risks. So, may expect to generate more profit.
In construction, a lumpsum contract is helpful after the designing phase. So, when the soil is stable and the analysis work is completed.
Also, the client has complete details of what has to construct, where, and how. So, the contract checks all details and offer a competitive fixed price to complete all tasks mentioned in the contract.
However, both lump sum contracts with and without quantities are common in the construction industry.
As some times the client has a bill of quantities (BOQ) of construction work while sometimes only the tasks are written on the tender to bid on.
Therefore, the contract expects more profit by biding high on the lumpsum contract. Also, certain unit prices for many items with indefinite quantities are given.
Also, the allowance to cover unexpected conditions and risk is included.
Although, it takes a long time to study and award a lumpsum contract.
However, the sample of the lump sum contract example given in this article will minimize the change orders during construction work execution.
So, as a bottom line, the lump sum agreement between parities works when the work is well defined and both parties know every inch of the project. Also, there are minimum lump sum contract variations.
Types of Construction Contracts
There are several contracts awarded in a construction project. However, most common ones include the following:
- Fixed Price Contracts (FP)
- Cost Reimbursable Contracts (CR) or Cost Plus Contracts (CP)
- Lump-Sum Contracts
- Time and Material Contracts (T&M)
- Unit Pricing Contracts
- Express Contracts
- Implied Contracts
- Bilateral Contracts
- Unilateral Contracts
Components of a Lump Sum Contract Estimate
A contractor’s detailed lump sum estimate for any construction project includes the following elements.
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- Contractor’s Markup
- Indirect Costs
- Subcontractor Quotations
Advantages of Lump Sum Contract for Client
The lump sum contract advantages and disadvantages are different for both parties. So, let’s discuss the advantages of a lump sum contract in construction for clients and owners at first.
- Well defined work makes the bid analysis and selection process easy.
- Fixed Cost of All the Construction Activities
- The contractor will work smoothly to complete the work at earliest.
- It’s easier for owners and contractors to manage lumpsum contracts.
- Contractor Assign the best personnel to complete the work.
- It frees the owner from all the risks.
- A lumpsum contract makes loan approval documentation easy and smooth.
Advantages of Lump Sum Contract for Contractor
The lump sum contract in construction example has the following advantages for the contractor but not limited to.
- The profit expectation is more due to the well defined work.
- Fewer change orders of work motivate the contractor to finish the job at earliest.
- Stable and Smooth Cash Flow due to fixed price.
- The contractor charge higher markup for the unseen potential risks.
- Less overhead expenses for the contractor to manage change orders and accounting.
Disadvantages of Lump Sum Contract in Construction
There are pros and cons to everything. So, the following are some disadvantages of the construction lumpsum agreement.
- Lumpsum contract risks are higher for the contractor.
- The change orders aren’t easy to approve.
- A detailed study and analysis are required before the start of work.
- The contractor will perform the work as per its choice of means and methods.
- The contractor prices are fixed and higher than usual as it covers unseen potential risks costs.
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Lump Sum Contract Variations
The lumpsum agreement includes more variations as compared to some other types of construction contracts.
As it includes a high risk for the contractor. Also, the process of the contract is lengthy and costly for the contractor.
Therefore, it is important to understand the possible variations of a lumpsum contract.
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The lump sump contraction price is fixed as per the well-defined work. However, there is room for modifications and up-gradation in the scope of work.
Thus, the contract must include the conditions for changes in design, material, and quantities for the same fixed price.
So, a client should include a proper variation and valuation process in the construction lumpsum contract.
The examples of lumpsum contract events should be defined in the agreement. Like how to deal with the situation if the client fails to maintain supplies of material, work order, and funds.
Also, the clauses to handle the natural disasters and weather conditions are defined in this section. So, the contractor defines the process of reimbursement for losses to the client and contractor.
The lumpsum contract example where the client opt-out to pay any additional charges for the undefined work. So, the provisional sum clause is useful to include as an estimate of the total fixed price of the contract.
The lumpsum contract must include the proper mechanism of making provision for fluctuations in inflation. So, the contractor should get compensation for inflation for long-term projects.
As the contract bids are relevant to the current price. So, any fluctuation in the said prices will directly impact the fixed price of the contract in the same proportion.
The lump sum contract sales tax variation is important to mention. As the long-term construction project may go on for several financial years.
So, who will handle the sales tax laws and how it will be included in the contract will is hefty to understand.
Possible Disputes in Lump Sum Contract in Construction
The lumpsum agreement is only suitable for short-time projects. As many factors affect the price of the contract.
However, the following are the possible claims and disputes of lumpsum agreements in a construction project.
Any request for a change in the scope of work like design and material may lead to disagreement between parties.
As the requested changes may not be possible for the contractor to fulfill at the fixed price and requires additional expenses.
Scope and Design Changes
The client may ask for the modification in the scope of work. Also, the contractor may suggest changes in design based on the previous experience.
So, the lack of variations on the contract may result in a conflict of handling add-on expenses.
The unforeseen risks in the construction project push the contractor to keep extra margins. So, if all goes right and nothing prompts up during a construction project.
The client may feel unexplained to pay such a high price for a simple project. Also, the unbalance approach towards funds release and unit prices of items may lead to such type of conflict in lumpsum contract example.
Provision of Early Completion
Some lumpsum agreements include a provision to compensate for the contract for the earliest completion of the project.
However, if conditions don’t allow the work to be completed on time. The owner will challenge the provision of early completion.
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Construction LumpSum Contract Example
There are several examples of a lumpsum contract in construction projects. The most common are:
- Construction of a Manufacturing Plant Contract
- Construction of Warehouse Contract
- Hospital Construction Lump Sum Contract
- Residential Society Lumpsum Contract
- Construction of Commerical Market or Tower Contract
So, there are many guidebooks available online in the form of a lump sum contract template and lump sum contract PDF to understand lumpsum agreements for different projects.
Frequently Asked Questions
There are many questions in the FAQ list of lumpsum construction contract agreements. However, the basic ones are:
A lump-sum agreement binds the contractor to complete the defined scope of work along with its risks in stated fixed price using any method or mean.
A construction firm agrees to execute the defined work of the client at a fixed price at the fastest pace. It includes terms of payment, variations, and disputes.
The lump-sum contract binds the contractor to take responsibility for executing the complete work for a stated fixed amount of money. So, the single fixed price is agreed between parties before the start of work.
A lump-sum agreement is sometimes misunderstood as “fixed price”. However, it is not always true. The lump-sum means the agreement of a single “lump-sum” price for some work. This price may change later as the scope of work changes.
A guaranteed maximum price or cost-reimbursement contract typically includes a 5% contingency in the contract while a lump sum contract price doesn’t have it.
Thus, the price of a GMP contract is always higher than the lump sum contract.
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