Lump sum contract - pros and cons
A lump sum contract is the traditional means of procuring construction, and involves a single ‘lump sum’ price for all the works being agreed before the works begin.
It is generally considered a beneficial contract agreement if the work 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.
The advantages of a lump sum contract include:
- Lump sum contracts can be seen to reduce client risk as the price is fixed (although in reality it is still likely to vary, but not by as much as some other forms of contracting).
- It is widely accepted and understood as a method of contracting.
- The bidding analysis and selection process is relatively straight-forward.
- The greater degree of certainty on the part of the client can make it simpler and easier to secure a construction loan.
- Change orders are minimised.
- The management required by the client is reduced.
- There can under certain circumstances be a greater margin for profit for the contractor.
- Lump sum payments are made in regular, predictable instalments, providing the contractor with a reliable and stable cash flow and making financing simpler for the client.
Disadvantages include:
- It can give greater risk to the contractor than some other contract forms, as there are fewer mechanisms available for them to vary their price.
- As a result of the additional risks faced by the contractor, they may increase their tender price.
- Careful documentation and record keeping of change orders is required, which can be time-intensive.
- Preparing the tender may be more expensive for the contractor.
- As a result, there may be a slower tender process than for other contract forms.
- Progress may be slower as the design will generally need to be completed before the works begin.
- The employer may have to pay a higher price for any alteration or additions that are required that are beyond the scope of the contract.
- It can be seen as a more adversarial form of contracting than some more collaborative forms.
- Disputes can arise relating to change orders, scope and design changes, and so on.
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