It is important to properly develop a lump sum contract and execute it to the letter. But what is a lump sum contract in the construction sector? This is a type of construction contract where a single price is used for an entire project. The estimated cost is developed once the contractor has understood all the details of the construction project, including specifications, materials and schedules. Properly drafting and executing a lump sum contract for a construction project looks like this: contractors like lump sum contracts because they offer some autonomy and freedom to get the job done. Owners like lump sum contracts because they know exactly what the project will cost them in the end. You don`t have to worry about excessively inflated working hours or material markups. The price is what it is. Like lump sum contracts, these projects rarely have a predetermined number of parts. They can quickly become out-of-control trains, the total cost of which far exceeds the owner`s expectations. For more complex projects, such as the construction of commercial buildings or multi-stage renovations, lump sum contracts may not work as well. Due to the complexity of many projects, unforeseen changes are common.
Different site conditions can quickly put a key in the work, even in the best plans. The more moving parts there are in a project, the less likely it is that a contractor will choose a lump sum contract. If an owner has an overall idea of what they want, but the roadmap up to that point isn`t exactly clear, unit price contracts can work just fine. Unit price contracts are essentially a series of lump sum contracts throughout the duration of the project. The project is divided into phases, and a contractor provides a fixed price to complete each phase. Lump sum contracts are the norm in construction projects, but they are not suitable for all situations. These contracts are more appropriate for projects where final plans, terms and schedules are clearly defined and all assessments and other pre-construction activities are appropriately documented. These aspects are crucial so that the contractor can estimate the costs of the project and specify the lump sum accurately. These agreements are best suited for simple projects with subcontractors, specific parameters and a low risk of unforeseen problems. In the case of federal government projects, many projects are delivered under a fixed-price contract, which is very similar to a lump-sum agreement. The government prefers these contracts and believes they are the best way to use taxpayers` money for acquisitions and projects.
According to the Federal Acquisition Regulations (FAR), there are several options for fixed-price contracts that cover most scenarios. Although lump sum contracts are quite categorical in terms of scope and cost, preliminary or agreed sums refer to the price of the optional work of the project. The preliminary amount is included in the contract as a separate estimate and only changes if the owner decides that it is a good idea to proceed with the election work. The advantage of a cost-plus contract for a contractor is that they receive reimbursement for all costs incurred in the work. The changes do not affect their profits as much as with a lump sum agreement. The project can change and evolve, which can be a great advantage for an owner. As the name suggests, a guaranteed maximum price is the highest price an owner is willing to pay for a project. While a GMP contract may stand on its own, owners may also include GMP in other types of contracts.
They can look like a flat rate contract. The contractor evaluates the documentation and calculates the cost of the work and equipment. It takes into account the more expensive cement requested by the owner and includes a buffer amount to account for unforeseen expenses. It then adds another amount to cover overhead and profits to the final estimate of the project. The contracting authority accepts the price and the fixed contract: it is understood and accepted that the contractors often reconstitute the costs when pricing a fixed contract. Owners know that the contractor is taking the risk for the project, so they are willing to spend a little more for peace of mind. This makes lump sum contracts more expensive than other contract formats. A lump sum contract, also known as an agreed-sum contract, is a document that describes in detail the fixed costs of a construction project.
This type of contract can help owners and project managers define the scope and expectations of a construction project as well as the budget for the final invoice. Lump sum contracts can also help contractors inform project owners of the estimated cost of a project. To have the best chance of a project going smoothly, a lump sum contract requires a clear scope of work. The project should also be relatively simple, with as few variables as possible. In this scenario, a lump sum contract works incredibly well for the contractor. On the other hand, a fuzzy or muddy scope of work is a recipe for a payment problem under a lump sum contract. An essential part of a lump sum contract is the expected labor cost associated with the completion of a construction project. Much of the information in this section describes the costs of wages, hourly wages and overtime. Typically, labor costs include only information about the salary or payroll of people who are actively involved in a project. Labor costs can sometimes include salary information for administrative or other support staff employed by a contractor.
It can also include information about when project owners pay these costs to the contractor. In addition, this section may mention labor costs for subcontractors or other third parties that contractors may use. A general construction contract states that the contractor is responsible for his own actions, but not for the actions of the employer. Among the reasonable economic reasons why the contract should allow the contractor to claim additional costs for disruptions or delays on the part of the employer is the failure to provide appropriate instructions in a timely manner when it is necessary to receive them to advance the work. This type of provision reduces the risk that a contractor will seek legal assistance for an infringement action. When you have a detailed payment roadmap in front of you, it`s easier to budget and manage your cash flow. Lump sum contracts typically include percentage payments at certain stages of the project minus deductibles. Since they know what the total cost of the project will be, they know how much to expect and when to expect it. This timing and percentage makes receivables and cash flows much easier to overcome.
If you are sure you have done your homework, a lump sum contract can be very fair and beneficial for you and the project owner. Managing the risks, variations and other problems of lump sum contracts is transparent with the right accounting software. .