MEANING OF LUMP SUM CONTRACT- ALL YOU NEED TO KNOW

A lump sum contract, also known as a “stipulated sum contract,” is a construction agreement in which the contractor agrees to complete the project for a predetermined, set price. Under a lump sum agreement, the contractor submits a total project price instead of bidding on each individual item. However, this doesn’t necessarily mean that the entire sum is paid in a single payment at the end of the contract. A lump sum contract can define a total price for the project, but still call for progress payments to be made over time throughout the job.

A lump or stipulated sum is simply a single amount of money for completing the entire scope of work outlined in a construction contract. This sum includes the cost of work, any general condition costs, and the contractor’s fee.

The lump sum contract may contain a section that contains unit price of items. Unit Price is often used for those items that have indefinite quantities, such as pier depth. A fixed price is established for each unit of work.

Following are some of the features of the lump sum contract.

Builder is free to use any resources and processes to complete work.
Contractor or builder is responsible for proper work performance.
Work must be very well defined at bid time..
Owner’s financial risk should be low and fixed at outset.
Builder has greater chances of more profit.

Requirements of lump sum contract

Good project definition is required for lump sum contract.
Lump sum contract requires complete plans and specifications setting and directions in enough detail to enable a contractor to carry them out.
Stable project conditions are necessary.
Effective competition is necessary when bidding.
There should be much longer time to bid and to award lump sum type of project.

Advantages of lump sum contract

Low financial risk to Owner.
High financial risk to Contractor.
Know cost at outset.
Minimum Owner supervision related to quality and schedule.
Contractor should assign best personnel due to maximum financial motivation to achieve early completion and superior performance.
Contractor selection is relatively easy.

Disadvantages of lump sum contract

Changes in lump sum contract are difficult and costly.
Early project start is not possible because of need to complete design before bidding.
Contractor is free to choose lowest cost means, methods, and materials consistent with the specifications. Only minimum specifications will be provided.
If the owner is not able to write the desired specification, then he should expect that the contractor will use the lowest suitable grade materials. This will increase the profit of the contractor.
Hard to build relationship. Each lump sum project is unique.
Bidding is expensive and lengthy in lump sum contract.
Contractor may include high uncertainty within each Schedule of Value item.