Lump sum contract

A lump sum contract in construction is one type of construction contract, sometimes referred to as stipulated-sum, where a single price is quoted for an entire project based on plans and specifications and covers the entire project and the owner knows exactly how much the work will cost in advance. This type of contract requires a full and complete set of plans and specifications and includes all the indirect costs plus the profit and the contractor will receive progress payments each month minus retention. The flexibility of this contract is very minimal and changes in design or deviation from the original plans would require a change order paid by the owner. In this contract the payment is made according to the percentage of work completed. The lump sum contract is different from guaranteed maximum price in a sense that the contractor is responsible for additional costs beyond the agreed price, however, if the final price is less than the agreed price then the contractor will gain and benefit from the savings.

Advantages

• The owner's risk is reduced due to the price of the contract being fixed and variations are not as much like other contracts. • There are fewer change orders. • The bidding and contractor selection is less complicated. • Obtaining construction loans are easier with this type of contract. • The profit margins and percentages are greater for engineers and contractors. • Payments and instalments are made on regular basis which provides the contractor with a reliable cash flow. • Management of the contract is a lot easier for the owner. • It creates an improved communication and relationship between the design team, contractor, and the owner. == Disadvantages ==

Disadvantages

• There is a higher risk for the contractor. • Proper change order documentation is required which could be time-consuming. • Higher fixed price due to unforeseen conditions. • The contractor selection usually takes longer. • The design has to be completed before the start of activities. • Change orders could be rejected by the owner. • It increases the adversarial relationship among the stakeholders of the project. • The contractor has a freedom to choose its own methods. • Potential for disputes between the client and the contractor, due to for example unbalanced bids, change orders, design changes, and compensation for early completion. == Variations to lump sum contracts ==

Variations to lump sum contracts

Variations occur due to fluctuation in prices and inflation, provisional items, statutory fees, relevant events such as failure of the owner to deliver goods, etc. ==Case law==

Case law

• Harvey Shopfitters Limited -v- ADI Limited (2003): Work was commenced under a Letter of Intent but a formal contract document was never completed. Harvey wanted to be paid for work on a quantum meruit basis; ADI argued that a lump sum contract had been agreed and should be enforced. The England and Wales Court of Appeal held that there was sufficient certainty in the parties' prepared agreements to establish that a lump sum contract was in place. ==References==

Source: Wikipedia ↗

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