🕑 Reading time: 1 minuteIn lump sum construction contract contractor bids a single fixed price for all activities in the project scope. This method 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 project costs from drawings including overhead and his profit to determine the price of the project. 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.
- Advantages of Lump Sum Construction Contract
- Disadvantages of Lump Sum Construction Contract
- Matters of Disputes in Lump Sum Construction Contract
- Types of Variations in Lump Sum Contracts
Advantages of Lump Sum Construction ContractLump sum construction contract is the most widely accepted contract between the owner and the contractor due to it general predictability, easy management and assured maximum price arrangements.
Advantages of Lump Sum Construction Contract for Owner are as follows:1. There is certain degree of limitation over owner’s exposure as well as accountability at the time construction since he has already agreed upon a fixed rate. 2. Since the contractor has accepted a fixed price for the construction, 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 provides 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.
Advantages of Lump Sum Construction Contract for the Contractor are as follows:
- There is a greater margin for profit realization for contractors as well as designers.
- Due to its general reliability, contractors try to enhance quality of production and performance and try to complete work faster.
- Lump sum contracts offer comparatively easier assessment of soil conditions, bidding prices and pre- construction analysis which makes selection process less tedious.
- Accounting related to lump sum contracts are low-intensive that diminishes overhead expenses of the contractor and allow for stable cash flow.
Disadvantages of Lump Sum Construction Contract
- Lump sum contracts pose greater risk to contractor.
- Quantifying changes is a big challenge. Such contracts demand documentation and record keeping of change orders at all stages that further requires more paperwork.
- Rejection of change order requested by the employer.
- The building and construction design and plans have to be completed well before beginning the execution of activities.
- The overall construction completion could take longer than other contractual alternatives.
- Since the contract is based on fixed price, the contractor may start using sub-standard means and methods and products. In such a case, the owner should specify building materials well in advance.
- Lump-sum contracts usually end up with higher fixed price to cover unforeseen circumstances. Owners are responsible for unpredicted conditions which are beyond the control of either party.