A Lump Sum Contract (known as a Fixed Price Contract) is a contract with a single lump sum price for all of the works, and the contractor is responsible for completing the project within the agreed fixed cost set forth in the contract. If the contractor completes the project under the fixed total cost, then the contractor makes additional profits from the project. The Lump Sum Contract is normally used in the construction industry to reduce the contract administration costs. The Lump Sum Contract is the most recognised agreement form on simple and small projects, and generally appropriate where the project is already well defined in scopes and responsibilities of both parties, 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 labour and materials. The Lump Sum Contract can include incentives or benefits for early completion, or can also have penalties, called liquidated damages, for a late completion.
The Lump Sum Contract is also often ideal when an owner has very tight budget constraints or lack of experiences in the construction industry. A Lump Sum Contract requires that a contractor agrees to provide specified services or works for an agreed fixed amount or price. In the Lump Sum Contract, the owner has essentially assigned all the risk to the contractor, who in turn can be expected to ask for a higher markup in order to take care of unforeseen contingencies. A Contractor being contracted under a Lump Sum agreement will be responsible for the proper job execution and will provide its own means and methods to complete the work. The Lump Sum contract usually is developed by estimating labour costs, material costs, and adding a specific amount that will cover contractor’s overhead and profit margin. The amount of overhead calculated under a lump sum contract will vary from contractors, but it will be based on their risk assessment study and labour expertise.
Related Definitions in the Project: The Project Management; Project Contract; Project Cost
