In lump sum construction contract contractor bids a single fixed price for all activities in the project scope. This approach is particularly used for large construction projects and is a conventional but most popular types of construction contract.
The contractor bears the risks associated with this contract and is responsible for estimating undertaking costs from drawings including overhead and his profit to determine the price of the undertaking.
lump sum construction contract is considered as the most effective means of reducing construction price and is useful when projects and its activities are well defined.
Lump sum construction contract is the most widely accepted contract between the owner and the contractor due to it general predictability, easy administration and assured maximum price arrangements.
1. There is certain degree of limitation over owner’s exposure as well as accountability at the time building since he has already agreed upon a fixed rate.
2. Since the contractor has accepted a fixed price for the building, the owner is not liable for any over expenditure. This is the most important benefit.
3. It is much simpler to get construction loan with a Lump sum contract as it offers a high degree of certainty as far as cost is concerned.
4. It is much easier to supervise and manage Lump sum contracts.
5. The payments are made after fixed durations and that too based on the amount of work completed unlike the balloon payments in other arrangements.
Besides above benefits, lump sum construction contract promote better interaction and association between the owner, contractor and designer. The owner is also aware of the expense incurred due to change orders he needs. The contractors encourage effective project execution to earn better profit margin.
Even though Lump sum contracts are considered ideal for smaller construction projects, they could lead to dispute and claims arising out of contract agreements. The most disputable issues are:
Certain projects need submission of payment applications using unit quantities and unit prices. In such a case, the contractor may produce an unbalanced bid by raising unit prices on such items required early in the construction procedure like transportation and insurances and reducing unit price on substances which have to be used later.
In case of change order proposals suggested or received by the owner that may demand increased expenses, the rate quotation could lead to disagreements.
Based on building procedures and past experience, the contractor can suggest design changes. Contract provisions should be able to explain how those alterations in plan will be addressed and who will bear the add-on expenses.
Lump sum contracts may consist of provision for an early completion compensation for the contractor.
The above issues emphasize the fact that the fixed price provision in the contractual document of Lump-sum contract is far from being permanent and are very much liable to changes and alterations. Undeniably cost certainty is a major hiccup on any undertaking and lump sum contracts are no different.
Lump sum contract allocates more risk to the contractor when compared to some other types of construction contracts because the procedure of tender preparation is more expensive for the contractor. as a result, a clear mechanism has to be put in place to address varying conditions during the course construction by adding necessary provisions:
In a lump sum contract, even though the amount of work and its price are well defined, there is always scope for changes or up gradations. To cover such changes, agreements should include terms for contractors to go ahead with such design, material or quantity alteration without having to argue about expenses.
It’s key that contracts include an effective variation and valuation process.
This may include failure on the part of client to procure supplies or offer timely instructions to contractor or those events over which neither party have any control like inclement weather condition or natural disasters. In either case, such clauses must be included in the contracts that offer reimbursement for losses to contractor.
This is usually applicable in cases where the client may not opt to pay for undefined work. That is why a provisional sum is included in the contract document as an estimate of the total cost of construction.
Sound provisions should be added to the contracts to suitably compensate contractors in case of inflations on projects especially those which last for a length of time. The reason being tenders are based on current price and contractor should be paid in case of price change that occur during the entire period.
5. There must be clear clauses that include payments to subcontractors and other suppliers.
Read More: Types of building Contracts and Their Comparison