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Last edited 11 Jul 2022
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 the works is agreed before the works begin.
It is defined in the CIOB Code of Estimating Practice as, ‘a fixed price contract where contractors undertake to be responsible for executing the complete contract work for a stated total sum of money.’
This is generally appropriate where the project is well defined, when tenders are sought, and significant changes to requirements are unlikely. This means that the contractor is able to accurately price the works they are being asked to carry out.
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 in such circumstances 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 than some other forms of contract, as there are fewer mechanisms to allow them to vary their price, and they 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 the opening up works for inspection and testing.
It is important to recognise that 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. It would also give very little scope for the client to alter their requirements.
Advantages of lump sum contracts:
- Client's risk is minimal.
- Fewer variations.
- The client can arrange capital according to the payment plan.
- Contractor's cash flow is predictable.
- The tendering process is more transparent and impartial.
Disadvantages of lump sum contracts:
- Contractors risk is high (poor productivity and mismanagement can lead the project into a loss).
- Poor details and specs in the design can lead to project disputes.
- Delays in the client's financing can delay the project.
- The design should be complete and available before the pre-contract process.
- Procurement times can be long.
See also: Lump sum contract - pros and cons.
- Contract sum.
- Difference between lump sum and measurement contracts.
- Evaluation of claims.
- Firm price contract.
- Fixed price contract.
- Force account work.
- Guaranteed maximum price
- Loss and expense.
- Lump sum contract - pros and cons.
- Lump sum cost.
- Measurement contract.
- Nominated sub-contractors.
- Procurement route.
- Provisional sums.
- Relevant events.
- Target cost contract.
- Without quantities.
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