By Lynn Pearcey, MBA, Copywriter, AIA Contract Documents
January 13, 2023
Under a Lump Sum Contract, contractors agree to perform construction services for a set price. Unlike other contracts where expenses are itemized, a lump sum contract focuses solely on the total cost of the build.
If your project is simple with a limited amount of risk, chances are it’s a good candidate for a lump sum contract. Think in terms of scope. A hospital wing, a school gymnasium, or a mall … large-scale projects with a lot of variables, aren’t good fits. Conversely, kitchen remodels, bathroom renovations, or garage conversions, projects like these with small scopes are tailor-made for lump sum contracts.
When to Use a Lump Sum Contract
A construction project is a living, breathing endeavor, best defined by a myriad of moving parts and pieces. Lump sum contracts work best when all these things … people, resources, and plans —moving parts and pieces, are at rest. This is important because the last thing any party wants is an expensive surprise. This is especially true for the contractor who tends to be working on slim profit and error margins.
Having everything in place allows contractors to accurately project the lump sum they need to complete the build. With that, if a contractor has the core needs defined, approaching the owner with a lump sum agreement could seal the deal.
Communication is Important
Manpower, capital, and expertise are all vital components of a successful construction project, but so is communication. When a lump sum contract is used, the importance of communication increases exponentially. Good communication also limits the number of Change Orders. At the very least, communication allows both parties to understand the rationale behind a Change Order should the need for one arise.
Parties must commit to continuous communication, and anything less could prove costly. Both sides have vested interests in keeping in contact. For contractors, communication protects their profits, while for owners it keeps expenses at a minimum. Therefore, both should come into a lump-sum project intensely focused on open, honest dialogue.
Other Things to Consider
Lump sum contracts are basic, but not without hurdles. Contractor fraud is a concern for owners as in some cases, contractors inflate costs to increase profits and offset risks. Yes, communication is encouraged, but not every contractor complies. As such, if you’re an owner operating under a lump sum agreement, demand transparency during all phases of the project. This is especially crucial prior to the execution of the contract when every aspect of the project can be vetted for accuracy.
There’s a time for a lump sum contract and understanding when the time is right, is critical. Doesn’t matter if you’re an owner or contractor, carefully review the scope of the project to ensure it aligns with this agreement.
Count the costs, literally and figuratively, to make sure the project will yield realistic profits while exposing you to minimal risks. One truism of life is that timing is everything … and this includes lump sum contracts. Knowing when the time is right to use one is something every contractor, and the owner must recognize.
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.