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What is Lump Sum Contract
A lump sum contract is a type of construction contract in which a single price is quoted for an entire project based on plans and specifications and covers the entire project. Generally, clients have a rough idea about how much the work will cost. This is the oldest form of the construction contract. A lump sum contract is also known as a stipulated sum.
In this type of contract work is completed according to the drawings, design, and specifications supplied to them with the tender within the specified time.
Payment to contractors is made according to the percentage of work completed. Contractors can only raise the bill as per executed work.
This type of contract is not flexible. If an owner needs to change the plan, first he has to provide a change order for additional work. This additional work will not be part of the original contract.
If the project owner wants to modify this contract, he must submit a change order document, which must be approved by the contractor along with the price change. This makes lump sum contracts a bit inflexible, but they are one of the most popular types of construction contracts because they offer reliable prices for owners and a stable income for contractors.
Benefits of Lump Sum Contract
- The client knows the exact cost of the project.
- There is no need to measure every quantity measured on the construction site,
- There is no advance payment for contractors.
- Excellent planning and efficient management make lump sum contracts very convenient.
Disadvantages of Lump Sum Contract
- These contracts require that the work be accurately and completely shown on drawings and described in specifications, and full information must be available on site. Otherwise, disputes can easily arise.
- Contractors may deliberately set high bids to protect themselves from job uncertainty.
- Difficulties arise when making intermediate payments. As a rule, the responsible person issues a certificate that he is satisfied that, by superficial or general measure, the cost of the work is not less than the amount established under the contractual agreement.
- A rate sheet is provided to the contractor, but it is not an appropriate form of the contract if significant additions or changes are anticipated.
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