CONSTRUCTION MANAGEMENT

Learn About Lump Sum

Construction Contracts

•••

BY JUAN RODRIGUEZ Updated October 23, 2017

A lump-sum contract is normally used in the

construction industry to reduce design and contract
administration costs. It is called a lump-sum
because the contractor is required to submit a total
and global price instead of bidding on individual
items. A lump-sum contract is the most recognized
agreement form on simple and small projects and
projects with a well-defined scope or construction
projects where the risk of different site conditions is
minimal.

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Lump-Sum Contract Basics

A lump-sum contract or a stipulated sum contract

will require that the supplier agrees to provide
specified services for a stipulated or fixed price. In a
lump-sum contract, the owner has essentially
assigned all the risk to the contractor, who in turn
can be expected to ask for a higher markup in order
to take care of unforeseen contingencies. A supplier
being contracted under a lump-sum agreement will
be responsible for the proper job execution and will
provide its own means and methods to complete the
work. This type of contract usually is developed by
estimating labor costs, material costs, and adding a
specific amount that will cover contractor’s overhead
and profit margin.

The amount of overhead calculated under a lump-

sum contract will vary from builder to builder, but it
will be based on their risk assessment study and
labor expertise. However, estimating a very large
overhead cost can lead the contractor to present
higher construction costs to the project owner.

The expertise of the contractor will determine how

their estimated profit will actually be; furthermore, a
poorly executed and long-delayed job will raise your
construction costs and eventually diminish the
contractor's profit.

When to Use This Type of Contract

A lump-sum contract is a great contract agreement

to be used if the requested work is well-defined and
construction drawings are completed.

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The lump-sum agreement will reduce owner risk, and

the contractor has greater control over profit
expectations. It is also a preferred choice when
stable soil conditions, complete pre-construction
studies, and assessments are completed and the
contractor has analyzed those documents. The
stipulated sum contract might contain, when
agreed-upon parties, certain unit prices for items
with indefinite quantities and allowance to cover any
unexpected condition. The time to award this type of
contract is also longer; however, it will minimize
change orders during construction.

Lump-Sum Contract Advantages

A lump-sum contract offers the following

advantages:

• Low risk to the owner.

• 'Fixed' construction cost.

• Minimize change orders.

• Owner supervision is reduced when compared to

Time and Material Contract.

• The contractor will try to complete the project

faster.

• Accepted widely as a contracting method.

• Bidding analysis and selection process is

relatively easy.

• The contractor will maximize its production and

performance.

…
Lump-Sum Contract Disadvantages

Although lump-sum contracts are the standard and

preferred option for all contractors, it might also
have some limitations:

• It presents the highest risk to the contractor.

• Changes are difficult to quantify.

• The Owner might reject change order requests.

• The project needs to be designed completely

before the commencement of activities.

• The construction progress could take longer than

other contracting alternatives.

• The contractor will select its own means and

methods.

• Higher contract prices that could cover

unforeseen conditions.

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Lump-Sum Critical Items

Lump-sum contracts are a great tool for smaller jobs

and quite simple projects. However, lump-sum
contracts could eventually produce large dispute
and claims that will arise from contract documents.
The most common arguing factors are:

• Unbalanced Bids: Some projects might require

producing an application for payment using unit
quantities and unit prices. Many contractors will
produce an unbalanced bid by rising unit prices
on items to be completed early in the project,
such as mobilization, insurances, and general
conditions, and lowering unit prices on items
needed in later stages.

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• Change Orders: If the owner produces or receives

a change order proposal from the contractor, the
price quotation could be possibly disputed. The
Owner might appeal that the requested change
was already covered under contract provisions. It
is important to prepare specific contract clauses
specifying how change orders are going to be
managed and to what extent the contractor
could claim delay damages.

• Scope and Design Changes: A contractor may

suggest design changes based on their
experience. Contract provisions should be clear
on how those changes will be addressed and how
those costs will be divided or who will be
responsible for the economic impact of the
proposed changes.

• Early Completion: Lump-sum contracts might

include an early completion compensation for the
contractor. Early completion might produce
higher savings for the project owner; however,
those clauses might be explicit in the
construction contract.

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