what is lump sum contract

A lump sum contract is a type of construction contract where a single price is quoted for an entire project based on plans and specifications. The contractor estimates the costs of materials, tools, labor, and indirect costs such as overhead and profit margin and provides a quote. The payment is made according to the percentage of work completed in other types of contracts, but in a lump sum contract, the payment usually occurs on an installment basis. The lump sum contract is different from guaranteed maximum price in a sense that the contractor is responsible for additional costs beyond the agreed price, however, if the final price is less than the agreed price then the contractor will gain and benefit from the savings. Lump sum contracts are standard in construction projects, but they aren’t suitable for every situation. These contracts work best for projects with finalized plans, clearly defined scopes and schedules, and proper documentation of all assessments and other pre-construction activities. Lump sum contracts are designed to reduce variations significantly, but they can still occur if there are overlooked details or unforeseen circumstances.