Lump sum contract is the simplest form of contract in construction projects. It fixes the price to be paid for undertaking out the work, before the start of the contract.
This type of contract is often based on firm bills of quantities and drawings. A lump sum price should cover all costs, overheads, risk contingencies and profit.
A lump sum price may be called for, or a series of lump sums. This is best suited to easily defined, relatively simple constructions, involving little below-ground work. However, some quite large above-ground constructions are paid for by lump sum. Sometimes a separate section of the bill for pricing allows for the foundation work of a building to be paid for‘on measure’.
In some kinds of civil engineering works, the lump sum payment method can pose serious risks upon a contractor, causing him to add a substantial sum to his tender. This is particularly so for design-and-build or‘turn-key’ projects where the contractor has to undertake detailed design as well as construction. The employer has to pay these additional sums whether or not any risks materialize.
A disadvantage is that an employer may have to pay a high price for any alteration or addition he wants to the project because the contractor is only committed to undertaking a fixed amount of work for the fixed payment. Payments under lump sum contracts are usually made in instalments as set out in the contract according to stipulated stages of completion, or linked to a programme or activity schedule.
Lump Sum Contract Advantages
A lump sum construction contract offers the following advantages:
- Low risk for the owner.
- ‘Fixed’ construction cost.
- Minimize change orders.
- Owner supervision is reduced when compared to Time and Material Contract.
- Construction can start before designs are complete and any consequent changes found necessary are the contractor’s responsibility.
- The contractor will try to complete the project faster.
- Accepted widely as a contracting method.
- Bidding analysis and selection process is relatively easily.
- Contractor will maximize its production and performance.
Lump Sum Contract Disadvantages
This type of contracting has also disadvantages.
- It presents higher risk to contractor.
- The project needs to be designed completely before the commencement of activities.
- Changes are difficult to quantify.
- The Owner might reject change order requests.
- The construction progress could take longer than other contracting alternatives.
- Contractor will select its own means and methods.
- Higher contract prices that could cover unforeseen conditions.
A lump sum contract is the most recognized agreement form on simple and small projects. For example, projects with a well-defined scope or construction projects where the risk of different site conditions is minimal.