3 Potential Pitfalls of Lump Sum Contracts for Contractors
For contractors, a lump sum contract, or a stipulated sum contract, is one of the most common types of contracts drafted in the construction industry because they are pretty straightforward. Owners and contractors can usually rely on a lump sum for less complex projects with a clearly defined scope of work.
Lump sum contracts allow for work or services to be agreed upon and performed for a single price, unlike contracts like the cost-plus. In spite of this contract being a popular choice, our Fort Lauderdale construction attorneys know that there are some potential pitfalls contractors should understand.
Contractors will carry much of the risk with a lump sum contract. With the exception of owner-initiated changes, if there are any cost overruns outside of the agreed fixed price, the contractor is responsible for those costs. This is why it is crucial that contractors estimate overall cost and profits and execute the project seamlessly in order to classify a project as successful.
Lien Waiver Issues
A dispute could arise if the contractor provides the owner with statements of payment without actual payment amounts listed. Technically, a contractor is not obligated to show owners their accounting detailing how much subcontractors have been paid; however, this could be an issue for owners. Owners will want to protect their own interest against a lien against their properties and will want to know every party on the project as well as when and how much they are paid to secure themselves against a lien.
If contractors do not thoroughly read their lump sum contract, this could lead to unexpected costs that relate to the work they hire subcontractors to perform on a project. Without standard architectural and engineering approval clauses drafted into the contract, the contractor can be stuck paying thousands of dollars to have drawings examined and stamped by another engineer.
Lump sum contracts have many advantages and can still work for contractors, they just require strict management. Contractors should also have the contract reviewed by a knowledgeable Fort Lauderdale construction attorney to ensure it will not go from a lump sum agreement to a much more expensive arrangement.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.