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. 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. In this contract the payment is made according to the percentage of work completed. 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. 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. According to Associated General Contractors of America, “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.” 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. And the contrast to these documents Contractor is evaluating and agreeing with the owner to complete the works without exceeding the agreed lump sum amount.
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.
There are less change orders and they are reduced.
The bidding and contractor selection is less complicated.
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.
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. 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.
