Lump Sum Contracts .. little of concern for PFC27 Oct 2021 21:25
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What Is a Lump Sum Contract?
Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contractor provides a fixed price for the project. These contracts require the owner to complete the project’s plans, designs, specifications and schedule before the contractor can establish a price. The contractor then estimates the costs of materials, tools, labor and indirect costs such as overhead and profit margin and provides a quote.
If the project’s final costs are lower than the contactor’s estimate, then their profit increases. If the estimate is too low, the contractor’s bottom line suffers. However, the project owner’s finances are unaffected in either scenario.
So, what does lump sum mean in a contract? Despite the “lump-sum” moniker, this term refers to how the project is priced rather than the payment terms. With these contracts, payment usually occurs on an installment basis. This can be as project benchmarks are met or in regular increments (e.g., monthly).
To modify a lump-sum contract, project owners must submit a change order document that the contractor must approve along with any price changes. That makes lump-sum contracts somewhat inflexible, but they provide a reliable price for owners and reliable revenue for contractors, making them one of the most popular types of construction agreements.
Contractors and project owners often wonder, “what is the difference between fixed price and lump sum contracts?” Simply put, these terms are interchangeable and are two names for the same concept. However, there are some crucial distinctions between lump sum contracts and other construction agreements.
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