All About Lump Sum Contracts Part 2
If the first part of this series, we introduced the concept of lump sum contracts and highlighted some of its advantages for contractors. While it’s an increasingly popular type of contract, it’s not universally used. This is due, in part, to a number of disadvantages that will be discussed in this article.
To recap, a lump sum contract is one with a set price for the contractor’s work. This price is based on the cost of labor and materials plus a markup for overhead and profit margin. Since the contractor incurs risk with this contractual arrangement, she can typically command a higher fee. Lump sum contract arrangements demand a higher level of communication between the contractor and the client. When prices are set, it becomes critical that the scope of the project remains consistent.
In addition to the advantages listed in part one, a lump sum contract presents the following benefits as well:
- Less change orders: Since the cost is set prior to the start of the project, the scope tends to be flushed out more. This means that change orders are less likely to occur.
- Selecting subcontractors and material suppliers is easier: With set prices, certain bids can automatically be eliminated, making for a less intensive process.
Disadvantages of Lump Sum Contracts
There are a few detractors to this contractual arrangement, which we will list below. As with any contract, careful consideration must be given. It’s highly advisable to speak with a contractor attorney in Mobile, AL before entering a contract.
- Less room for change: With lump sum contracts, the project price and scope are determined ahead of time. This leaves little room for change, even if it is necessary. In this arrangement, owners typically pay for change orders. They may be less motivated to pay for them if they are already paying high overhead fees.
- The process may take longer: More planning goes into projects with lump sum contracts. This can stretch out the time your work on a project.
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.