Lump-Sum Contracting
This procurement method used in construction and other industries where a single fixed price, known as the “lump sum,” is agreed upon and contracted for the completion of an entire project or a defined scope of work. Under a lump sum contract, the contractor is responsible for delivering all the required work and services within the agreed-upon price, regardless of any cost fluctuations or changes that may occur during the project’s execution. This type of contract provides the client with cost certainty and minimizes financial risk, as the final payment is determined upfront based on the agreed scope of work.
Advantages for project owners
The main advantage of lump sum contracts for project owners lies in their predictability. With a lump sum contract, owners can anticipate the project’s completion within the agreed budget and often achieve quicker timelines, enabling contractors to optimize resources and reduce labor costs. Additionally, lump sum contracts offer project owners little financial risk, as any cost overruns are the responsibility of the contractor. This reduced risk factor simplifies the process of obtaining financing for owners, as lenders favor well-defined projects with clearly delineated costs.
Nevertheless, lump sum contracts come with specific criteria that can prove advantageous or challenging to a construction project.
Constructability and Budget Control
Led by our preconstruction experts, we leverage best practices and invaluable lessons learned knowledge to optimize design and construction efficiencies. Additionally, we engage in continuous value engineering to ensure the highest value is achieved at the lowest cost, all while preserving your design vision
Cost fluctuations
In lump sum contracts, the prices of labor and materials can fluctuate and change during the course of the project. Contractors may face the challenge of absorbing additional costs if prices rise, but they can also benefit from savings if rates go down. These risks are particularly prominent in extended projects. To address these uncertainties, contractors must carefully consider possible upward fluctuations and account for them when providing estimates for the project.
Provisional sums
While lump sum contracts are known for their comprehensive scope and fixed costs, they may include provisional or stipulated sums, referring to the price of optional project work. These provisional sums are presented as separate estimates within the contract and only change if the owner decides to proceed with the elective work. However, incorporating work associated with stipulated sums can pose challenges to the project schedule, especially if implemented later in the project’s timeline, potentially requiring formal change orders. It is vital for the terms of a lump sum contract to clearly outline how to handle provisional sums and establish the boundaries for any related changes to ensure smooth project execution.
