In lump sum construction contract contractor bids a single fixed price for

all activities in the project scope. This method is particularly used for
large construction projects and is a conventional but most popular types
of construction contract.

The contractor bears the risks associated with this contract and is
responsible for estimating project costs from drawings including overhead
and his profit to determine the price of the project.

lump sum construction contract is considered as the most effective means

of reducing construction price and is useful when projects and its
activities are well defined.

Advantages of Lump Sum Construction

Contract
Lump sum construction contract is the most widely accepted contract
between the owner and the contractor due to it general predictability,
easy management and assured maximum price arrangements.
Advantages of Lump Sum Construction Contract for Owner
are as follows:
1. There is certain degree of limitation over owners exposure as well as
accountability at the time construction since he has already agreed upon
a fixed rate.

2. Since the contractor has accepted a fixed price for the construction, the
owner is not liable for any over expenditure. This is the most important
benefit.

3. It is much simpler to get construction loan with a Lump sum contract

as it provides a high degree of certainty as far as cost is concerned.

4. It is much easier to supervise and manage Lump sum contracts.

5. The payments are made after fixed durations and that too based on the
amount of work completed unlike the balloon payments in other
arrangements.

Advantages of Lump Sum Construction Contract for the

Contractor are as follows:
1. There is a greater margin for profit realization for contractors as
well as designers.
2. Due to its general reliability, contractors try to enhance quality of
production and performance and try to complete work faster.
3. Lump sum contracts offer comparatively easier assessment of soil
conditions, bidding prices and pre- construction analysis which makes
selection process less tedious.
4. Accounting related to lump sum contracts are low-intensive that
diminishes overhead expenses of the contractor and allow for stable cash
flow.

Besides above benefits, lump sum construction contract promote better

interaction and association between the owner, contractor and designer.
The contractors encourage effective project execution to earn better profit
margin. The owner is also aware of the expense incurred due to change
orders he needs.

Disadvantages of Lump Sum Construction

Contract
1. Lump sum contracts pose greater risk to contractor.
2. Quantifying changes is a big challenge. Such contracts demand
documentation and record keeping of change orders at all stages that
further requires more paperwork.
3. Rejection of change order requested by the employer.
4. The building and construction design and plans have to be
completed well before beginning the execution of activities.
5. The overall construction completion could take longer than other
contractual alternatives.
6. Since the contract is based on fixed price, the contractor may start
using sub-standard means and methods and products. In such a case, the
owner should specify building materials well in advance.
7. Lump-sum contracts usually end up with higher fixed price to cover
unforeseen circumstances. Owners are responsible for unpredicted
conditions which are beyond the control of either party.

Matters of Disputes in Lump Sum

Construction Contract
Even though Lump sum contracts are considered ideal for smaller
construction projects, they could lead to dispute and claims arising out of
contract agreements. The most disputable issues are:

1. Unbalanced Bids
Certain projects need submission of payment applications using unit
quantities and unit prices. In such a case, the contractor may produce an
unbalanced bid by raising unit prices on such items required early in the
building process like transportation and insurances and reducing unit price
on materials which have to be used later.

2. Change Orders
In case of change order proposals suggested or received by the owner
that may demand increased expenses, the rate quotation could lead to
disagreements.

3. Changes related to Scope and Design

Based on construction procedures and past experience, the contractor can
suggest design changes. Contract provisions should be able to explain
how those alterations in plan will be addressed and who will bear the add-
on expenses.

4. Compensation for Early Completion

Lump sum contracts may consist of provision for an early completion
compensation for the contractor.

The above issues emphasize the fact that the fixed price provision in the
contractual document of Lump-sum contract is far from being permanent
and are very much liable to changes and alterations. Undeniably cost
certainty is a major hiccup on any project and lump sum contracts are no
different.

Types of Variations in Lump Sum Contracts

Lump sum contract allocates more risk to the contractor when
compared to some other types of construction contracts because the
process of tender preparation is more expensive for the contractor.
Therefore, a clear mechanism has to be put in place to address varying
conditions during the course construction by adding necessary provisions:
1. Variations
In a lump sum contract, even though the amount of work and its price are
well defined, there is always scope for changes or up gradations. To cover
such changes, agreements should include terms for contractors to go
ahead with such design, material or quantity alteration without having to
argue about expenses.

Its essential that contracts include an efficient variation and valuation

process.

2. Relevant events
This may include failure on the part of client to procure supplies or
provide timely instructions to contractor or those events over which
neither party have any control like inclement weather condition or natural
disasters. In either case, such clauses should be included in the contracts
that provide reimbursement for losses to contractor.

3. Provisional sum
This is usually applicable in cases where the client may not opt to pay for
undefined work. That is why a provisional sum is included in the contract
document as an estimate of the total cost of construction.

4. Fluctuations in Inflation
Sound provisions should be added to the contracts to suitably compensate
contractors in case of inflations on projects especially those which last for
a length of time. The reason being tenders are based on current price and
contractor should be paid in case of price change that occur during the
entire period.

5. There should be clear clauses that include payments to subcontractors

and other suppliers.