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Construction Lump-Sum Contract

2 signers
1 Contractor
2 Owner
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Construction Lump Sum Contract Template

In general, construction firms use lump sum contracts to reduce design administration costs. This lump sum is used because the contractor must provide the total and global prices rather than bid on individual items to be paid in full. Also known as a stipulated sum contract, a lump sum contract is a best-agreed form for simple or minor projects with defined scope or construction projects with fewer risk factors than other site conditions.

construction lump sum contract template
Every construction project has its own characteristics, but it also shares many similarities with other projects. To complete a project successfully, contractors need to establish clear expectations with their clients upfront. This includes choosing the right type of contract to use for the project.

It is known that lump sum construction contracts comprise a lot of US building contracts. They may share some of the same language and provisions, but their most significant differences are how payments are calculated based on the works and materials delivered. Read on to find out how we outline the advantages and cons of a lump sum contract.

Why Use a Construction Lump Sum Contract Template?

A lump sum contract provides a very effective contractual arrangement when required work is clearly defined, and construction drawings are completed. The lump sum agreement reduces ownership risks and gives contractors more flexibility in estimating profits.

A preferred choice when stable conditions have been established, complete predevelopment and evaluation studies have been conducted, and the contractors have analyzed the document. A contract with stipulated sums may contain when agreed-upon terms, specific units of cost, and allowance to cover unplanned conditions.

In certain situations, an entire project may require lump sum contracting. In general, projects with lump sum contracts have two crucial aspects. The concept is generally easy to read and remains unaffected throughout the project, defining the scope.

Packages are generally purchased simultaneously and minimize any effects from fluctuating material costs for the contractor’s business plan. On complex tasks — such as building construction and multi-phase remodeling — such lump sum contracts would not be effective.

To ensure the benefits of using a lump sum construction contract, it is important to use a template that covers all requirements and ticks all the boxes. Use this read-made agreement from Fill to get started.

Exploring the Typical Contents of Lump Sum Contracts

Lump sum contracts may differ depending on their scope, but they generally cover all of the elements listed below:

  • Scope and requirements of the project, including the project owner, materials, and equipment needed.
  • Detailed design drawings and specifications to help clarify expectations.
  • Project schedule outlining when different activities will take place and what needs to be completed by each milestone.
  • Payment schedule, including the total amount of money that is due and when each payment needs to be made.
  • Mechanisms for resolving disputes or unexpected changes in the project’s scope or timeline.
  • Other special provisions that may apply to your project, such as performance standards, contract termination clauses, or insurance requirements.

Because each project is unique, it’s important to work with a trusted and experienced construction firm when choosing a lump sum contract. With the right partner, you can navigate the process and successfully complete your project on time and within budget.

Cost-plus contracts

Cost-plus contracts are comparable to a lump sum contract in that the owner will cover the contractor’s overhead costs, such as labor, subcontractor materials, equipment, and labor, and a portion of the contractor’s profit margin and overheads. The cost of these services is reimbursed individually rather than in lump sum amounts. This agreement is not necessary to finalize projects for the owners. So the scope of the work will change. In contrast to lump sum agreements, a buyer is at risk if the cost of the final works is greater than anticipated because they are directly reimbursing the contractor’s costs.

Time and materials contracts

The Time and Materials (T&M) agreement stipulates the owner pays for materials and daily and weekly payments for labor. Like cost-plus contracts, the time and materials contract works well despite ambiguity about the project’s scope. T&M contracting provides contractors with daily or weekly rates that offer stability. Project owners enjoy the flexibility of these agreements and ensure that the work is completed as specified. Time and materials contracts have more additional paperwork compared to lump sums, as labor costs and indirect costs have to be documented correctly.

Guaranteed maximum price contracts

In general, a guarantee-maximum pricing contract or otherwise called a not-to-exceed prices contract requires owners to reimburse contractors for direct costs and a fee for overheads. However, only a certain threshold can be exceeded. The contractor will incur additional costs unless the figure has already been reached. The maximum pricing is increased through change orders when project scope changes, but not due to errors or costly outages. The contractor will be paid the same price if the project costs more than expected and the contract is not longer than expected.

Common disputes

There is disagreement in many projects. The common dispute forms are usually in lump sum contracts. There is no clear and transparent contract in place. The owner can not really know what the final project cost was or what the contractor did in this job. Contractors hide the margins, ensuring that such secrecy is maintained throughout the payment process. Throughout the chain, these feelings of fear can lead to disputes. Scope creeps are often very problematic for many businesses. Contractors may be forced to make smaller modifications to prevent causing upset or prolonging the payment process.

FAQ About Construction Lump Sum Contracts

In a lump sum contract, the contractor agrees to carry out the work for a predetermined fixed price. The contractor is submitting a total cost for the project rather than putting up a bid for a specific item.
A lump sum agreement or specified sum is the fundamental agreement between contractors and clients. Contracts with an upfront or stipulated sum of funds are based on an agreement by the contractor with respect to specified services.
Lump sum agreements stipulate formal change ordering procedures and significant paperwork. There may also be the possibility of paying higher amounts to cover contractors’ cash flow incurred in unexpected scenarios, which thus makes lump sum contracts a bit more expensive than other building and construction industry contracts.

Lump sum contracts impose more risks on contractors than other types of contracts because of the comparatively low pricing mechanism. However, they also tend to offer the client little certainty in terms of the cost of work.

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