Lump sum contract

Lump sum contract in construction is one of the construction contracts, which is sometimes referred to as stipulated-sum, a single price is quoted for the entire project based on plans and specifications and covers the entire project and the owner knows exactly how much the work will cost in advance. [1] This type of contract requires a full and complete set of plans and specifications and includes all the indirect costs plus the profit and the contractor will receive progress payments each month minus retention. The flexibility of this contract is very minimal and changes in design or deviation from the original plans would require a change order paid by the owner. [2] In this contract the payment is made according to the percentage of work completed. [3] The lump sum contract is different from guaranteed maximum price in a sense that the contractor is responsible for additional costs beyond the agreed price, however, if the final price is less that the agreed price then the contractor will gain and benefit from the savings.[4]

Typical Lump Sum Contract Structure

There are some factors that make for a successful execution of a lump sum contract on a project such as experience and confidence, management skills, communication skills, having a clear work plan, proper list of deliverables, contingency, and dividing the responsibility among the project team. [5]

According to Associated General Contractors of America (AGC), “In a lump sum contract, the owner 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 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.”[6]


In lump sum Contracts or fixed-price contracts, the contractor is evaluating the value of work as per the documents available. Mainly these documents can be specifications and the drawings. In pre-tender stage Contractor evaluates the cost to execute the project (based on the above documents such as drawings, specifications, schedules, tender instruction and the clarification received for the raised queries). And the contrast to these documents Contractor is evaluating and agreeing with the owner (or employer) to complete the works without exceeding the agreed lump sum amount.[7]

Advantages
  • The owner's risk is reduced due to the price of the contract being fixed and variations are not as much like other contracts. [8][9]
  • There are less change orders and they are reduced. [8][9]
  • The bidding and contractor selection is less complicated.[8][9]
  • Obtaining construction loans are easier with this type of contract.[9][8]
  • The profit margins and percentages are greater for engineers and contractors.[8][9]
  • Payments and installments are made on regular basis which provides the contractor with a reliable cash flow.[8][9]
  • Management of the contract is a lot easier for the owner.[8][9]
  • It create an improved communication and relationship between the design team, contractor, and the owner.[8][9]

Disadvantages


  • There is a higher risk for the contractor.[8][9][10]
  • Proper change order documentation is required which could be time-consuming.[8][9][10]
  • Higher fixed price due to unforeseen conditions.[8][9][10]
  • The contractor selection usually takes longer.[8][9][10]
  • The design has to be completed before the start of activities.[10][8][9]
  • Change orders could be rejected by the owner.[8][9][10]
  • It increases the adversarial relationship among the stakeholders of the project.[8][9][10]
  • The contractor has a freedom to choose its own methods.[8][9][10]

Disputes in Lump sum contracts

Lump sum contracts are suitable for small projects, however, there are some potential causes that could result in disputes between the client and the contractors. Some of these disputes could be due to unbalanced bids, change orders, design changes, and compensation for early completion. [8]

Variations in Lump sum contracts

Variations occur due to fluctuation in prices and inflation, provisional items, statutory fees, relevant events such as failure of the owner to deliver goods, and etc.[8][9]

Variations are typically broken down into two categories: beneficial and detrimental where the former is for improvement of work quality, cost and schedule reduction, and the latter is a negative change in performance or quality of work due to client's financial difficulties. There are many reasons for variations to occur but main causes are normally due to omission in design, inadequate design, changes in specifications and scope, and lack of coordination and communication among the stakeholders.[11]

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References
  1. The project resource manual : CSI manual of practice. New York: McGraw-Hill; Construction Specifications Institute. 2005. ISBN 0071370048. OCLC 56191871.
  2. Halpin, Daniel W. (2006). Construction management (3rd ed.). Hoboken, NJ: Wiley. ISBN 0471661732. OCLC 61425134.
  3. "The Pros and Cons of Pricing Options in Construction Contracts". Bell Davis Pitt. 2017-06-20. Retrieved 2019-07-04.
  4. "Fixed price construction contract - Designing Buildings Wiki". www.designingbuildings.co.uk. Retrieved 2019-07-04.
  5. "Managing Design under Lump-Sum Contract | Journal of Management in Engineering | Vol 11, No 2". ascelibrary.org. doi:10.1061/(asce)0742-597x(1995)11:2(21). Retrieved 2019-07-04.
  6. "Associated General Contractors". www.agc.org. Retrieved 2019-07-04.
  7. "5 pros & cons of Lump sum Contracts/Fixed price Contracts (with video explain)". Quantitysurveyor.blog.
  8. "Lump Sum Construction Contract - Advantages and Disadvantages". The Constructor. 2016-12-09. Retrieved 2019-07-04.
  9. "Lump sum contract - pros and cons - Designing Buildings Wiki". www.designingbuildings.co.uk. Retrieved 2019-07-04.
  10. "Lump Sum Contract Advantages and Disadvantages in Construction". Construction Tuts. 2017-02-05. Retrieved 2019-07-04.
  11. Khalid, Zul Khafiz Mohd; Sahamir, Shaza Rina; Rahman, Nurul Asra Abd; Zainordin, Zainab Mohmad (2019). "Methods of Valuing Construction Variation in Lump Sum Contract from the Public Client's Perspective". MATEC Web of Conferences. 266: 03023. doi:10.1051/matecconf/201926603023. ISSN 2261-236X.
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