Last edited 24 Jan 2017

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 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.

However, a lump sum contract does not give all the project risk to the contractor, and it is not a fixed price, or even a guaranteed maximum price. The price of a lump sum contract can change.

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 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.

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.