Lump sum contract
A lump sum contract (or stipulated sum contract) is the traditional means of procuring construction, and still the most common form of construction contract. Under a lump sum contract, a single ‘lump sum’ price for all of the works is agreed before the works begin.
It is generally appropriate where the project is already well defined when tenders are sought and changes are unlikely. This means that the contractor is able to accurately price the risk they are being asked to accept.
Lump sum contracts might be less appropriate where speed is important, or where the nature of the works is not well defined. Other forms of contract that might be more appropriate include measurement contracts (used where the works can be described in reasonable detail, but the amount cannot), cost reimbursement contracts (used where the nature of the works cannot be properly defined at the outset, often used where an immediate start on site is required), target cost contracts and so on (see procurement route for more information).
Lump sum contracts apportion more risk to the contractor that some other forms of contract and give the client some certainty about the likely cost of the works. The tender process will tend to be slower than for other forms of contract and preparing a tender may be more expensive for the contractor.
Mechanisms for varying the contract sum on a lump sum contract include:
- Variations: These are changes in the nature of the works. Most contracts will contain provision for the architect or contract administrator to issue instructions to vary the design, quantities, quality, sequence or working conditions.
- Relevant events: A relevant event may be caused by the client (for example failure to supply goods or instructions), or may be a neutral event (such as exceptionally adverse weather) and may result in a claim for loss and expense by the contractor.
- Provisional sums: An allowance for a specific element of the works that is not defined in enough detail for tenderers to price.
- Fluctuations: A mechanism for dealing with inflation on projects that may last for several years where the contractor tenders based on current prices and then the contract makes provisions for the contractor to be reimbursed for price changes over the duration of the project.
- Payments to nominated sub-contractors or nominated suppliers.
- Statutory fees.
- Payments relating to opening-up and testing the works.
The better defined the works are when the contract is agreed, the less likely it is that the contract sum will change.
A truly 'fixed' price contract would not necessarily be in the interests of the client as it would require that the contractor price risks over which they may have no control, and which might not arise.
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