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