Write a Detailed note on Lump Sum contractSolutionA Lump Sum

Write a Detailed note on Lump Sum contract

Solution

A Lump Sum Contract (or Fixed Price Contract) is a type of contract in which a single lump sum price for all of the works are performed. This method is particularly used for large construction projects and is a conventional but most popular type of construction contract. A contractor under the Lump Sum Contract is responsible for completing the project within the agreed fixed cost set forth in the contract. If the contractor completes the project under the agreed fixed total cost, then the contractor may make additional profits from the project.

The Lump Sum Contract is normally used in the construction industry to reduce design and contract administration costs. The Lump Sum Contract is the most recognized agreement form on simple and small projects, generally it is appropriate where the project is already well defined, and changes are unlikely therefore the owner must have sufficiently detailed and complete drawings and specifications, and construction documents at the time of the bid to allow the bidders to properly estimate the cost of labor and materials.

Advantages of Lump Sum Construction Contract

Lump sum construction contract is the most widely accepted contract between the owner and the contractor due to it general predictability, easy management, and assured maximum price arrangements.

? Advantages of Lump Sum Construction Contract for Owner are as follows:

i. There is a certain degree of limitation over owner’s exposure as well as accountability at the time construction since he has already agreed upon a fixed rate.

ii. Since the contractor has accepted a fixed price for the construction, the owner is not liable for any over expenditure. This is the most important benefit.

iii. It is much simpler to get a construction loan with a Lump sum contract as it provides a high degree of certainty as far as cost is concerned.

iv. It is much easier to supervise and manage Lump sum contracts.

v. The payments are made after fixed durations and that too based on the amount of work completed unlike the balloon payments in other arrangements.

? Advantages of Lump Sum Construction Contract for the Contractor are as follows:

i. There is a greater margin for profit realization for contractors as well as designers.

ii. Due to its general reliability, contractors try to enhance the quality of production and performance and try to complete work faster.

iii. Lump sum contracts offer a comparatively easier assessment of soil conditions, bidding prices, and pre-construction analysis which makes the selection process less tedious.

iv. Accounting related to lump sum contracts is low-intensive that diminishes the overhead expenses of the contractor and allow for stable cash flow.

Disadvantages of Lump Sum Construction Contract

i. Lump sum contracts pose the greater risk to the contractor.

ii. Quantifying changes is a big challenge. Such contracts demand documentation and record keeping of change orders at all stages that further requires more paperwork.

iii. Rejection of change order requested by the employer.

iv. The building and construction design and plans have to be completed well before beginning the execution of activities.

v. The overall construction completion could take longer than other contractual alternatives.

vi. Since the contract is based on a fixed price, the contractor may start using sub-standard means and methods and products. In such a case, the owner should specify building materials well in advance.