5 pros & cons of Lump sum Contracts/Fixed

price Contracts (with video explain)

Leave a Comment / Contracts / By raoneqs
Table of Contents
 What is a Lump sum contracts or Fixed price contract
 What are the advantages and disadvantages of Lump sum contracts/Fixed price contracts?
o Advantages of lump-sum contracts/Fixed price contracts
o Disadvantages of lump-sum contracts/Fixed price contracts
o More insight on lump sum contracts/fixed-price contracts

 What are the Contractor’s tasks and responsibilities of lump-sum/fixed-price
contracts
 Below are the critical characteristic of lump sum contracts
 Design changes and specification changes
 The payment process of fixed price contracts
 Fixed price contracts-Additional tips
 Order Variation
 Additional benefits of lump sum contracts,
 Early Achievement

What is a Lump sum contracts or Fixed price contract

Lump-sum contracts are the most favourite contract type used in the construction
industry. Also known as fixed-price contracts. Because in these contracts, the contract
price is fixed and agreed at the initial stage. In industry, this contract type is recognizing as
one of the safest contract types for clients. But the Contractor’s responsibility and risk are
very high in fixed-price contracts.
Let me explain the main advantage and disadvantages of lump-sum contracts (fixed-price
contracts).

What are the advantages and disadvantages of Lump

sum contracts/Fixed price contracts?
Advantages of lump-sum contracts/Fixed price contracts
 Client’s risk is minimal.
 Fewer variations
 The Client can arrange capital according to the payment plan.
 Contractors cash flow is predictable.
 The tendering process is more transparent and impartial.
Disadvantages of lump-sum contracts/Fixed price contracts
 Contractors risk is high (ill productivity and mismanagement can lead the project into
a loss)
 Improper details and specs in the design can lead to project disputes.
  Delays in the Client’s financing can delay the project as well.
 The design should be complete and available before the pre-contract process.
 Procurement time can be high.
For more insight about lump sum contracts, See our explainer  video  also for more insight.
VIDEO-5 pros & cons of Lump sum Contracts/Fixed price Contracts
More insight on lump sum contracts/fixed-price contracts
What are the Contractor’s tasks and responsibilities of lump-sum/fixed-price contracts
In fixed-price contracts, the Contractor is evaluating the value of work as per the documents
available. Mainly price will determine based on specifications and the drawings.

Moreover, the Contractor should request any missing information or documents before
submitting the price. If not, the Client expects the contactor to allow a budget for all this
missing information. After evaluating and reviewing these documents, the Contractor is
agreeing to complete the works without exceeding the agreed fixed price. Under a lump-
sum agreement, it is the responsibility of a contractor to implement the appropriate work.
He should also offer suitable resources and techniques to accomplish the task.
Below are the critical characteristic of lump sum contracts
The primary condition of this contract type is that, agreed budget should not alter (without
any changes to the design or specs). Also, the quality and the standard of the project should
keep according to the documents provided at the tender stage( quality cannot deviate
without prior approval of the Client). These are all the critical characteristics of the fixed-
price contracts. But the Contractor is providing the rates and quantity breakdown for the
fixed price. 
Design changes and specification changes
Client and client’s representatives will intensively check design and specification at the
construction stage. In lump-sum contracts, the contractor can’t change specs or design
without proper approvals. But the contractor can propose design change as a value
engineering option. Based on contractual terms, contractors may charge eligible
percentage fees from saving offered from value engineering option.
The payment process of fixed price contracts
Contractor and client agree on a project program before commencing the works. Project
milestones will decide based on the project program. Concerning this program, A payment
schedule will agree between both parties. Upon successful completion of each milestone,
the client will release the agreed amount based on the payment schedule.

In some exceptional cases, The Client may agree to pay additional compensation for the
early completion of the project.

Fixed price contracts-Additional tips

Apart from the fixed price, The Client may also be agreed to pay fluctuation of the material
costs separately. But the losses due to low productivity and losses due to material delays
should be bare by the contractor.
But lump-sum contracts can also create large disagreement and entitlements from
contract documents. The following are general factors that can arise:
Order Variation
When the holder creates or notes an order variation bidding from the contractor, the price
citation can become unclear. The holder may also submit the plea that the required
variation was initially controlled under contract requirements. To formulate particular
contract clauses mentioning the method to control the order variation are necessary. 
Additional benefits of lump sum contracts,
Early Achievement
Lump-sum contracts may consist of early achievements return for the contractor. These
early achievements can create the highest revenue for the project holder.