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How does lump sum contract work?

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.

When would you use a lump sum contract?

When to Use This Type of Contract A lump-sum contract is a great contract agreement to be used if the requested work is well-defined and construction drawings are completed. The lump-sum agreement will reduce owner risk, and the contractor has greater control over profit expectations.

What is the difference between fixed price and lump sum contract?

Lump sum (or stipulated sum) contracts are sometimes referred to as 'fixed price' or 'firm price' contracts, although strictly this is not correct. On a lump sum contract, a single 'lump sum' price is agreed before the works begin.

What is a lump sum fixed price contract?

Lump Sum or Fixed Price Contract Type This type of contract involves a total fixed priced for all construction-related activities. Lump sum contracts can include incentives or benefits for early termination, or can also have penalties, called liquidated damages, for a late termination.

What are the advantages and disadvantages of lump sum contract?

8. Lump Sum Contract(Advantages) Low risk on the owner, Higher risk to the contractor Cost known at outset Contractor will assign the best personnel Contractor selection is easy. 9. Lump Sum Contract(Disadvantages) Changes is difficult and costly.

What is the difference between lump sum and cost plus a fee compensation?

With a lump sum contract, all the risk is placed on your contractor. Cost plus, you take on all the risk. Everything is billable, and the contractor has no risk for this. In return, you might be charged a lower markup.

Is lump sum and fixed price the same?

Lump sum (or stipulated sum) contracts are sometimes referred to as 'fixed price' or 'firm price' contracts, although strictly this is not correct. On a lump sum contract, a single 'lump sum' price is agreed before the works begin.

What is the difference between GMP and lump sum?

A Lump Sum contract price will always be lower than the Guaranteed Maximum Price in a GMP/Cost-Plus contract because the GMP/cost-Plus contract will include a construction contingency (typically 5% plus or minus that is not included in a Lump Sum contract amount.

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