Lump sum contracts
The distinguishing feature of a lump sum contract is that the contractor is responsible for performing and completing the work as defined in the Scope of Work, for the fixed price stipulated in the contract.
For lump sum contracts to be successful, they require:
- precise definition of scope, quality of the deliverable and timing of work
- timely availability of Company supplied materials/services
- a well-defined and reasonable split of risk between Company and contractor
- minimum scope changes
- a detailed mechanism for agreeing the effects of changes to time and cost (e.g. schedules of rates for agreed extras)
These requirements imply a significant amount of project planning and definition prior to the tendering and evaluation, and can require a long lead time before a contract can be awarded.
Payment and cost control
Payment under lump sum contracts may be either against a series of milestones (based on completion of a particular part of the contract), as a single payment upon completion, or on a monthly basis against measured quantities. Milestone payments offer the following advantages:
- The quantities of work (milestones) upon which payments will be based can be clearly defined in advance, and time-consuming monthly measurement of (and disputes about) completion percentages can be avoided;
- Milestone payments provide a good incentive for the contractor to deliver each piece of work not only on time, but also properly completed.
| What are the advantages of a lump sum contract? | What are the Disdvantages of a lump sum contract? |
| Once signed, the cost should only vary as a result of agreed variations and claims. | Long lead time before actual contract commences. |
| Costs are known ahead of the project execution, are easy to control, and a low risk to the Company. | Less influence over deliverable. |
| Straightforward contract. management and administration. | Potential for claims (particularly if there are many variations in the orders, causing delays or disruptions to the project). |
| Contractor usually has strong incentive to perform well. | Unless the scope of work is very specific, the contractor may tend to increase the contract price as a protection against potential risks in the contract. |
- Unit Rate contracts
- Reimbursable cost contracts
- Dayrate contracts for Big Projects
- Time and Materials Contract for Projects | Advantages & Disadvantages
- Bills of quantities contracts