WHAT IS THE LUMP SUM PRICE? - ARTE - 2024

The lump sum price is a single “lump sum” price that applies to all works or projects, the most common form being the construction contract, before work begins.

It is the total amount that must be paid to a contractor for the work of the completely completed work, which has been carried out according to the project and the requested quality standards. When it is the case, that its services are also duly verified and working.

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This price will include the cost of both labor and materials, as well as the management of all kinds of licenses and procedures for the approval of the work, the technical direction and the preparation of the corresponding executive project. It does not include the costs incurred for the payment of rights at the time of the process.

The price quoted will be a lump sum, which means that the price of all these stipulated services is totally frozen during the period of time determined in the contract until its total completion. This happens as of the signing of this, immediately upon payment of the advance established by said contract.

Lump sum contract

A lump sum contract is the agreement in which the contractors agree to be responsible for the full performance of the contract work, for a declared total sum of money.

A lump sum contract is commonly used in the construction industry to reduce contract design and administration costs. It's called a lump sum because the contractor must submit a global price, rather than bidding on individual items.

Therefore, it is the most recognized agreement for small projects or projects with a well-defined scope. Also for construction projects where the risk of different situations occurring on the site is minimal.

The bidding process will tend to be slower than for other forms of contract; on the other hand, preparing a bid may be more costly for the contractor.

Lump sum contracts distribute more risk to the contractor than other forms of contract. This is because there are fewer mechanisms that allow them to vary their price, while giving the client some certainty about the probable cost of the works.

When is it appropriate?

In general, this type of contract is appropriate when the project is well defined. Also when looking for offers and it is unlikely that significant changes will be made to the requirements. This means that the contractor can accurately appraise the works they are asked to do.

This type of lump sum contract might be less appropriate when speed is important, or when the nature of the work to be carried out is not well defined. In such circumstances, other forms of contract may be more appropriate.

Critical elements

A lump sum contract does not assign all project risk to the contractor. It is also not a fixed price, not even a guaranteed maximum price. The price of a lump sum contract can change.

The better defined the works are when the contract is agreed, the less likely it is that the contract amount will change.

However, it is important to recognize that a truly premium contract may not necessarily be in the customer's interest. This is because it would require the contractor to jeopardize alarms over which they have no control and that might arise.

On the other hand, it would also give very little scope for the client to alter their requirements.

The elements that can vary the amount of the contract in a lump sum contract are the following:

- Payments to designated subcontractors or designated suppliers.

- Statutory rates.

- Payments related to the opening and testing of the works.

Variations

These are changes in the nature of the works. Most contracts will contain resolutions for the contract administrator or architect to formulate instructions to correct quantities, design, quality, working conditions or sequence.

Provisional amounts

It is an allocation for a specific element of the works, which is not specified in sufficient detail for bidders to quote.

Relevant events

A relevant event may be caused by the customer, such as not having delivered the instructions or the provision of products. It could also be a neutral event, such as exceptionally hostile weather.

This can result in a claim for additional expenses and losses on the part of the contractor.

Fluctuations

It is a mechanism to deal with the inflationary process in projects that can last several years or where there is high inflation.

In this case, the contractor proposes offers based on current prices. The contract then establishes provisions for the contractor to be reimbursed for price changes during the duration of the project.

What are the parties after?

As far as the client is concerned, when he foresees that the project will be carried out at a lump sum, he tries to have fully determined the amount he will pay for the completion of the project that he will commission from the builder.

For this reason, the client must have the scope of the project defined as flatly as possible when requesting or receiving proposals, because it depends on whether the proposal or budget presented to them is realistic. This will allow proper performance of the contract in due course.

On the other hand, for the builder showing a quote or offer, the concept of a lump-sum price implies an opportunity and a challenge.

The opportunity to take advantage of this pricing scheme if you analyze the risks properly. This in order to be able to obtain the greatest possible utility.

In the same way, the challenge of being able to clearly define the scope of the works; know if you can do it under the conditions that the client requests and in the required execution time.

Know the scope

It is categorical for both parties to know the scope during the phase prior to signing the contract. Likewise, the conditions and expected terms of realization. This way, it will be possible to specify what the client is willing to pay, as well as the price for which the builder is willing to carry out the work.

For example, a client who requires a builder to prepare a project in just six months, which would normally take twelve months to complete, at the same price it would cost to do it in twelve months, is not sensible and therefore puts the project at risk.

This is because sooner or later the builder will try to recoup the lack of equity in the proposal. The contractor who does not take these conditions into account when making his proposal is risking the project.

References

1. Designing Buildings Wiki (2018). Lump sum contract. Taken from: designingbuildings.co.uk.
2. Eco-Finance (2019). Flat Price. Taken from: eco-finanzas.com.
3. Solid Engineering (2019). Provision of services at a lump sum. Taken from: solidez.com.mx.
4. The Balance Small Business (2019). What You Need to Know About Lump Sum Construction Contracts. Taken from: thebalancesmb.com.
5. Business Dictionary (2019). Lump sum. Taken from: businessdictionary.com.