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

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 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:

1. Variations

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 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.

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