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May 4, 2022

One of the oldest and most common construction procurement methods is the fixed-price contract, also known as lump sum or stipulated sum contracts.

A stipulated sum contract is exactly what the name suggests—a construction agreement in which the owner and contractor agree to a predetermined, set project price to complete a project. The AIA Document A101™–2017 is a familiar fixed price standard form of agreement between owner and contractor. From financing to paperwork, these contracts are comfortable for both parties when a project is well-defined. It’s often used in straightforward projects such as strip mall or warehouse projects, in essence, projects where the cost to build is very well understood.

However, while seemingly simple, stipulated sum contracts require some attention to detail to realize the best results for both owner and contractor.

Here are the three of the most common areas of misunderstanding or disagreement:

Clarity of Work Scope: One of the most common issues in a stipulated sum contract is ambiguity in the work scope, specifically for allowances, unforeseen purchases or other variables that could change the work scope or drive up the cost of construction. Material allowances are often a source of misalignment. For instance, the owner expects high quality subway tile in all homes of a subdivision, but the contractor assumes a low grade tile in the bid. Whether you are the owner or the contractor, make sure all parties understand the quality of materials to be used, and that those choices are documented, particularly in these times of supply chain disruptions.

Contingency Confusion:  Many contracts include contingencies, money held in reserve to cover unexpected costs that could arise during a construction project. While everyone agrees that money should be held in reserve, some forget to outline where that money goes if it’s not used – the contractor or back to the owner? In a typical lump sum arrangement where the contingency is included in contract sum, the unused contingency will likely go to the contractor. Be sure everyone understands where this money goes if not used before contract signing.

Progress Payments:  Stipulated sum contracts typically include detailed progress payment percentages—those partial payments once a contractor completes a predefined stage of work. No matter the type of work, make sure that all parties understand the process required to receive progress payments and the timeline for submittal.

If you’re an owner with a project that has a clear scope of work, fully detailed design and a small chance of unforeseen conditions, the stipulated sum contract is likely a good procurement method for all parties. But remember, stay fixed and focused: Be clear about that scope (limit the variables), define contingency spend and clearly outline the progress payment schedule.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.