All About Lump Sum Contracts Part 1
As contractors, the type of contract that you enter into sets the tone for how work will be done on a project. As a matter of fact, having a Fort Lauderdale construction attorney review your contracts before signing is always a great idea. Contracts can dictate how and when work will be done, who assumes financial risk, and how disputes will be handled, among many other items. One such contract that has a tremendous impact on the tone of a working arrangement is a lump sum contract.
Lump sum contracts are contractual arrangements in which the contractor creates a set price for his or her work as opposed to an estimated price. The price in a lump sum contract is based on estimated labor and materials costs along with a markup for project overhead and profit margin. This type of contract works best when specific details surrounding the project, such as soil conditions are stable, and the scope is well defined.
Why a Lump Sum Contract?
A lump sum contract presents a number of advantages to both contractors and owners and, when possible, is a preferred way of doing business. Here are a few of the benefits:
- Risk vs. Reward: Contractors take on the financial risk in a lump sum contract because they are setting a price before a project starts. Projects are fluid and anything can happen. That said, contractors can command a higher rate for their services to compensate for that risk, making these contracts more lucrative.
- More Collaboration: Since prices are set, contractors and owners have to work closely to ensure that the finished product is in keeping with what is desired. Change orders come at a cost so communication is more frequent to ensure that the contractor “gets it right” the first time.
For more advantages as well as disadvantages of lump sum contracts, visit part 2 of this series.
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.