Lump Sum Contract

Also known as Stipulated Sum contract

The Lump Sum Contract can sometimes be called 'Stipulated Sum' and is the most basic form of agreement where the contractor/supplier agrees a fixed lump sum price to undertake all the specified contract works and the employer agrees to pay this price upon completion of works.

The Schedule of Rates may be provided by the employer but quantities are usually binding upon the contract drawings and specifications. The SoR can be used for payment purposes and the rates used for assessments of design changes and additional work.

Advantages:

1. Lower financial risk to Employer.
2. Higher financial risk to Contractor.
3. Minimum Owner supervision related to quality and schedule.
4. Contractor has higher incentive to achieve earlier completion and better performance.
5. Contractor selection is relatively easy.

Disadvantages:

1. Changes difficult and costly. (but it usually is)
2. Need to substantially complete design prior to bidding.
3. Contractor inclined to choose lowest methods / materials to comply with specification.
4. Hard to build relationship. Each project is unique.
5. Bidding expensive and lengthy.
6. Contractors may include high contingency within each Schedule of Rate item

Contractors will bid for the project with an overhead and profit based on the assessment of risk and difficulty. This O&P is usually in the range of 10 to 15 percent of the project costs as a guideline for relatively uncomplicated projects.

This means that the contractor bears the majority of the risks in terms of any material and labor cost fluctuation. In practice, however, if the risks causes the costs to exceed the estimates too much, it may lead to disputes over the scope of work or attempts to substitute less expensive materials for those specified. This is one of the reasons that the design and specifications should be well developed during the tender of the project to minimize any future disputes.

The Lump Sum Contract may contain a section that stipulates certain unit price items. Unit Price is often used for those items that have indefinite quantities, such as pier depth. A fixed price is established for each unit of work.

In theory if this contract type is carried out well, the Employer's financial risk is low and fixed at outset and in theory the Contractor has greater potential for profit.

Requirements:

1. Good project definition.
2. Stable project conditions.
3. Effective competition essential when bidding.
4. Much longer time to bid and award this type of project,
5. Minimum scope changes due to higher mark-ups than occurred at bidding.