So what does a lump sum in a contract mean? Despite the nickname ”lump sum”, this term refers to the pricing of the project and not the terms of payment. With these contracts, payment is usually made on a staggered basis. This can be when the project benchmarks are reached or at regular stages (para. B monthly). Lump sum contracts are a great tool for small orders and fairly simple projects. However, lump sum contracts could ultimately give rise to significant disputes and claims arising from contractual documents. The most common reasoning factors are: A lump sum contract offers the following advantages: All construction contracts deal with critical aspects of a project, including the scope of services, the price and terms of payment, the timing, and an explanation of each party`s rights and obligations. However, lump sum contracts have specific criteria that can be both an advantage and an obstacle to a construction project. The follow-up of lump sum contracts by the owner is minimal because the owner does not have to track the costs. In addition, the payment structure of fixed-rate contracts typically includes regular payments on certain iterations or as a percentage of work performed, simplifying accounts payable processes.
The contractor evaluates the documentation and calculates the cost of the work and equipment. It takes into account the more expensive cement requested by the owner and includes a buffer amount to account for unforeseen expenses. It then adds another amount to cover overhead and profits to the final estimate of the project. The client accepts the price and the lump sum contract: the owners must submit and comply with the completed designs and final plans, which makes the project rigid. When a change is required, lump-sum contracts provide for the use of a formal change order process and important documents. T&M contracts offer entrepreneurs a daily or weekly rate that provides a stable income. Project leaders benefit from the adaptability of these agreements to ensure that the work is carried out according to specifications. As with cost plus and T&M contracts, unit price contracts benefit project leaders when they have a general idea of the project to be carried out, but the concrete planning is not yet complete. For example, you can set a price per square foot for flooring and installation, although you don`t know exactly how many square feet of flooring you need to cover. Since you know roughly how much materials and labor would cost, you can set a unit price for this and other aspects of a construction project. Entrepreneurs can master good approximations of the costs and revenues of each step.
Owners and contractors can adjust the project as needed without having to place change orders and renegotiate prices, as would be the case with a lump sum contract. A notable shortcoming is that there is a significant risk of cost overruns, as these contracts do not usually have a single threshold. Cost-plus contracts are similar to lump-sum contracts in that the owner agrees to pay the contractor`s costs, including labour, subcontractors, equipment and materials, as well as an amount for the contractor`s profits and overheads. But instead of a lump sum to cover all expenses, these expenses are reimbursed individually. In the case of lump sum contracts or fixed-price contracts, the contractor evaluates the value of the work based on the available documents. Mainly these documents can be specifications and drawings. In the pre-announcement phase, the contractor evaluates the cost of executing the project (based on the above documents such as drawings, specifications, schedules, tender instructions and clarifications received for the questions asked). And unlike these documents, the contractor evaluates and agrees with the owner (or employer) to complete the work without exceeding the agreed lump sum. [7] Despite the increased financial risk of lump sum contracts compared to other types of agreements, contractors still receive many benefits. A lump sum construction contract is a type of construction contract, sometimes called an agreed sum, where a single price for an entire project is given based on plans and specifications and covers the entire project and the owner knows exactly how much the work will cost in advance. [1] This type of contract requires a complete and complete set of plans and specifications and includes all indirect costs plus profits, and the contractor receives progressive payments each month minus withholding.
The flexibility of this contract is very low and design changes or deviations from the original plans would require a modification order paid for by the owner. [2] In this contract, payment is made based on the percentage of work performed. [3] The lump sum contract is different from the maximum guaranteed price in that the contractor is responsible for additional costs that go beyond the agreed price, but if the final price is lower than the agreed price, then the contractor will benefit and benefit from the savings. [4] For unit price contracts, the price is based on the estimated unit cost of materials and is divided into stages, usually by construction (e.B. carpentry, electrical, plumbing and more). For this reason, unit price contracts are the norm in subcontracts. For example, many painting contracts follow a unit price structure because the paint is usually calculated on a square foot basis. A lump sum contract is typically used in the construction industry to reduce contract planning and management costs. It is called a lump sum because the contractor must provide a total and total price instead of bidding on individual items.
A lump sum contract is the most recognized form of agreement for simple and small projects and projects with a well-defined scope or construction projects where the risk of different site conditions is minimal. Although lump sum contracts are quite categorical in terms of scope and cost, preliminary or fixed sums refer to the price of optional work. The preliminary amount is included in the contract as a separate estimate and only changes if the owner decides that it is a good idea to proceed with the election work. While flat-rate contracts are the standard and preferred option for all contractors, there can also be some limitations: Contractors and project managers often wonder, ”What`s the difference between fixed-price contracts and flat-rate contracts?” Simply put, these terms are interchangeable and are two names for the same concept. However, there are crucial differences between lump sum contracts and other construction contracts. To amend a lump sum contract, project managers must submit a change order document, which the contractor must approve with any price change. This makes lump sum contracts a bit rigid, but they offer a reliable price for homeowners and reliable income for contractors, making them one of the most popular types of construction contracts. Lump sum contracts are the norm for construction projects, but are not suitable for all situations.
These contracts are more appropriate for projects with completed plans, clearly defined scope and timelines, and adequate documentation of all assessments and other activities prior to construction. These aspects are crucial so that the contractor can estimate the costs of the project and specify the lump sum accurately. When all these elements are aligned, lump sum contracts provide a simple agreement that owners and contractors can easily understand and agree on. But what are the advantages and disadvantages of a lump sum contract? The advantages for owners include simplified accounting and low financial risk, and the disadvantages include rigidity in the scope of the project and the need to plan every detail before starting the project. The benefits for contractors include clear guidelines, less paperwork, and profit potential if the project is well under budget, and the downsides include risks if the project is more expensive than expected. .