Last edited 17 Aug 2018

Lump sum contract - pros and cons

A lump sum contract is the traditional means of procuring construction, and involves a single ‘lump sumprice 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:

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