5 pros & cons of Lump sum Contracts/Fixed price Contracts (with video explain)

What is a Lump sum or Fixed price Contracts

Lump-sum contracts are the most favourite contracts used in the construction industry. Also known as fixed-price contracts. Because in these contracts, the contract price is fixed and agreed at the initial stage. In industry, This contract type is recognising as one of the safest contract type for clients. But Contractors responsibility and risk are very high in fixed-price contracts.

Below are the main advantage and disadvantages of lump-sum contracts (fixed-price contracts).

What are the pros and cons of lump-sum/Fixed price contracts

Advantages
  • Client’s risk is minimal.
  • Fewer variations
  • The Client can arrange capital according to the payment plan.
  • Contractors cash flow is predictable.
  • The tendering process is more transparent and impartial.
Disadvantages
  • Contractors risk is high (ill productivity and mismanagement can lead the project into a loss)
  • Improper details and specs in the design can lead to project disputes.
  • Delays in the Client’s financing can delay the project as well.
  • The design should be complete and available before the pre-contract process.
  • Procurement time can be high.

See our explainer video also for more insight.

What are the Contractor’s tasks and responsibilities of lump-sum/fixed-price contracts

In fixed-price contracts,  the Contractor is evaluating the value of work as per the documents available. Mainly price will determine based on specifications and the drawings. Apart from specs and drawings, the Contractor should refer to all available documents, such as schedules, tender instruction and the clarification received (for the raised queries). Also, the Contractor should request any missing information or documents before submitting the price. If not, the Client expects contactor to allow a budget for all these missing information. After evaluating and reviewing these documents, the Contractor is agreeing to complete the works without exceeding the agreed fixed price.

Read :   Offer acceptance-How to An Offer Is Brought to an End

Below are the key characteristic of lump-sum contracts

The primary condition of this contract type is that, agreed budget should not alter (without any changes to the design or specs). Also, the quality and the standard of the project should keep according to the documents provided at the tender stage( quality cannot deviate without prior approval of the Client). These are all the critical characteristics of the fixed-price contracts. But the Contractor is providing the rates and quantity breakdown for the fixed price. 

Design changes and specification changes

Client and Client’s representatives will intensively check design and specification at the construction stage. In lump-sum contracts, the Contractor can’t change specs or design without proper approvals. But the Contractor can propose design change as value engineering option. Based on contractual terms contractor may eligible percentage fee from saving offered from value engineering option.

 

The payment process of fixed-price contracts

Contractor and Client agree on a project programme before commencing the works. Project milestones will decide based on the project programme. Concerning this programme, A payment schedule will agree between both parties. Upon successful completion of each milestone, the Client will release the agreed amount based on the payment schedule.

In some special cases, The Client may agree to pay additional compensation for early completion of the project.

Fixed price contracts-Additional tips

Apart from the fixed price, The Client may be agreed to pay fluctuation of the material costs separately. But the loses due to low productivity and loses due to material delays should be bare by the Contractor.

 

Read :   Procurement methods/ Contract types in Construction

Apart from the above fixed-price contract, there are few more procurement routes in the construction industry. And those have different pros & cons as well.

 

Follow this link for a document which UNOPS used for Lump sum contracts.

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