The bidding and contractor selection is less complicated. This … [3] 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 that the agreed price then the contractor will gain and benefit from the savings. It create an improved communication and relationship between the design team, contractor, and the owner. Under a lump sum contract, a single lump sum price for all the works is agreed before the works begin. [11], Associated General Contractors of America, "The Pros and Cons of Pricing Options in Construction Contracts", "Fixed price construction contract - Designing Buildings Wiki", "Managing Design under Lump-Sum Contract | Journal of Management in Engineering | Vol 11, No 2", "5 pros & cons of Lump sum Contracts/Fixed price Contracts (with video explain)", "Lump Sum Construction Contract - Advantages and Disadvantages", "Lump sum contract - pros and cons - Designing Buildings Wiki", "Lump Sum Contract Advantages and Disadvantages in Construction", "Methods of Valuing Construction Variation in Lump Sum Contract from the Public Client's Perspective", https://en.wikipedia.org/w/index.php?title=Lump_sum_contract&oldid=988945490, Creative Commons Attribution-ShareAlike License. [4], There are some factors that make for a successful execution of a lump sum contract on a project such as experience and confidence, management skills, communication skills, having a clear work plan, proper list of deliverables, contingency, and dividing the responsibility among the project team. A lump-sum contract is a great contract agreement to be used if the requested work is well-defined and construction drawings are completed. The design has to be completed before the start of activities. [8][9] Where the cost of a specific activity is identified as a "provisional sum", a variation in actual cost may be accepted by the employer. Mainly these documents can be specifications and the drawings. Potential for disputes between the client and the contractor, due for example to unbalanced bids, change orders, This page was last edited on 16 November 2020, at 04:27. 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. A lump-sum contract is normally used in the construction industry to reduce design and contract administration costs. 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. Change orders could be rejected by the owner. This type of contract usually is developed by estimating labor costs, material costs, and adding a specific amount that will cover the contractor’s overhead and profit margin. 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. Lump sum contract in construction is one of the construction contracts, which is sometimes referred to as stipulated-sum, a single price is quoted for the 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. Variations are typically broken down into two categories, beneficial and detrimental, where the former is for improvement of work quality, cost and schedule reduction, and the latter is a negative change in performance or quality of work due to client's financial difficulties. A lump sum building contract states that the contractor is responsible for his own actions but not the actions of the employer. The owner might appeal that the requested change was already covered under contract provisions. A lump-sum contract offers the following advantages: Although lump-sum contracts are the standard and preferred option for all contractors, it might also have some limitations: Lump-sum contracts are a great tool for smaller jobs and quite simple projects. Higher fixed price due to unforeseen conditions. The lump-sum agreement will reduce owner risk, and the contractor has greater control over profit expectations. The most common arguing factors are: Some projects might require producing an application for payment using unit quantities and unit prices. The time to award this type of contract is also longer; however, it will minimize change orders during construction. The expertise of the contractor will determine how their estimated profit will actually be. However, estimating a very large overhead cost can lead the contractor to present higher construction costs to the project owner. If the owner produces or receives a change order proposal from the contractor, the price quotation could be possibly disputed. It presents the highest risk to the contractor. an amount of money that is paid in one large payment on one occasion: She received a lump sum of €70,507 when she retired.

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