What is a Lumpsum Contract?
A lumpsum contract is a construction contract in which the parties agree to complete the project within a predetermined amount. This predetermined amount will be quoted based on the plans and specifications and it covers the entire project. There will not be any classification or split up for the amount of work you do, instead client pays a lumpsum amount to the contractor using different payment mechanisms. This type of contract requires a full and complete set of plans and specifications and it includes all the indirect cost and profits. This type of contract is less flexible. Any change in rate of items after the award of contract will not change the lumpsum amount and in such cases contractor has to bear those risk. This is one of the common types of agreements used in construction industry.
Lumpsum contracts are usually used when you have a clearly defined scope of work and they are relatively straight forward to complete. For instance, a deck builder could better use a lumpsum contract since the drawings and designs are straightforward and remain unchanged throughout the duration of project scope.
This type of contract provides a high risk to the contractor. If the project has an issue requiring additional labour or material then the contractor has to bear the responsibility for extra cost since the prices won’t change accordingly and price adjustments are made in contract based on a pre-decided formula.
Advantages
Disadvantages
- Simplest form of construction contract
- Easy financing for projects since the total cost is known upfront
- Easy management of cashflow
- Reduces the risk to client as the price is fixed
- The bidding analysis and selection process is relatively straightforward.
- Change orders are minimized
- Management required by client is reduced.
- Payments are made in regular, predictable instalments
- High risk to contractor than other forms of contract
- Tender prices may increase because of the high risk to contractor
- Careful documentation and record keeping of change orders is required, which can be time-intensive.
- Slow tender process compared to other forms
- Disputes can arise relating to change orders, scope and design changes, and so on.
- The employer may have to pay a higher price for any alteration or additions that are required that are beyond the scope of the contract.
Also read about Cost Plus Contract and Item Rate Contract and explore their suitability for your project.
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