What does lump sum mean in a contract?
A lump or stipulated sum is simply a single amount of money for completing the entire scope of work outlined in a construction contract. This sum includes the cost of work, any general condition costs, and the contractor's fee. Payment is tied directly to the percentage of work completed.
What is a fixed lump sum figure?
Fixed Lump Sum means the method of payment based upon Consultant's estimate of allowable costs such as salary, overhead, and Reimbursable Expenses, plus a reasonable margin of profit, all expressed as a single lump sum.
What are the characteristics of a lump sum contract?
The main characteristic of a lump sum contract is that the contractor generally isn't required to provide a detailed breakdown of costs and expenses. Instead, they are paid for completing the overall terms of the contract.
Is a lump sum contract flexible?
The flexibility of this contract is very minimal and changes in design or deviation from the original plans would require a change order paid by the owner. In this contract the payment is made according to the percentage of work completed.
What is the difference between fixed and lump sum contract?
Lump sum and measurement are both types construction contracts. Under a lump sum contract, a single 'lump sum' price for all the works is agreed before the works begin. It is defined as a fixed price contract, where the contractors agree to execute the work for a stated total sum of money.
What is disadvantage of lump sum contracts?
Disadvantages of a Lump Sum Construction Contract A lump sum agreement presents a higher risk to a contractor. Measuring the number of changes is difficult. Such contracts require paperwork and records of change orders from each phase, and this means further documentation is needed.
What are the advantages of a lump sum contract?
Under a lump sum agreement, project owners must provide contractors with finalized plans and thorough documentation, resulting in specific, linear project tasks. Lump sum contracts also require less paperwork, management and accounting, decreasing administrative costs.
What are the 4 types of contract?
Learn about written, verbal, standard form and period contracts, and things to be aware of before you make an agreement.
Who has the greatest risk in a lump sum contract explain your answer?
Lump sum contracts apportion more risk to the contractor than some other forms of contract, as there are fewer mechanisms to allow them to vary their price, and they give the client some certainty about the likely cost of the works.
What is the main disadvantage of lump sum taxes?
The main disadvantage of lump-sum taxes is the inefficient allocation of resources due to its regressive nature. The tax incidence of low-income earners is greater than that of higher-income groups.
Can contractor change price after contract signed?
Considerations When a Vendor's Prices Go Up Generally speaking, neither you nor the vendor has the right to unilaterally change the agreed-upon terms. But some contracts are crafted in anticipation of future changes in the size and scope of projects, with the flexibility for price adjustments.
Which type of contract is the financially riskiest for the contractor?
Fixed PriceFixed Price Fixed price contracts carry more risk to contractors than owners. They minimize the owner's (or GC's in contract with a subcontractor) construction cost risk and obligate the contractor to perform their work for a fixed dollar amount.
What is an example of a lump sum payment?
A lump sum payment is often associated with a single amount paid to acquire a group of items. For instance, a corporation might pay $50,000 for the inventory and equipment of a small manufacturer that is going out of business. The transaction did not specify any further details. The $50,000 is a lump sum payment.
How do you calculate the lump sum?
You must use the mathematical formula: FV = PV(1+r)^n FV = Future Value PV = Present Value r = Rate of interest n = Number of years For example, you have invested a lump sum amount of Rs 1,00,000 in a mutual fund scheme for 20 years. You have the expected rate of return of 10% on the investment.
How much is the lump sum death benefit from SSS?
The minimum monthly Death Pension is P1,000 if the member had less than ten (10) Credited Years of Service (CYS); P1,200 if with at least with ten (10 CYS); and P2,400 if with at least twenty (20) CYS.
Which is better lump sum or monthly payments?
In most cases, the lump-sum option is clearly the way to go. The main difference between a lump-sum and a monthly payment is that with a lump-sum option, you get to have control over how your money is invested and what happens to it once you're gone. If that's the case, then the lump-sum option is your best bet.
What Is a Lump Sum Contract?
Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contra...
What does lump sum mean in a contract?
Despite the lump-sum moniker, this term refers to how the project is priced rather than the payment terms. With these contracts, payment usually oc...
what is the difference between fixed price and lump sum contracts?
Simply put, these terms are interchangeable and are two names for the same concept. However, there are some crucial distinctions between lump sum c...
Why do you agree to lump sum payments?
Ideally, you would agree on payments for milestones after a major deliverable has been accepted so that the seller has cash coming in and the buyer is assured that the deliverables are met. Lump sum may have the disadvantage for the seller that cost for external resources rise whereas the lump sum stays the same.
What is a firm fixed price?
The term firm fixed price or lump sum contract refers specifically to a type or variety of fixed price contract where the buyer or purchaser pays the seller or provider a fixed total amount for a very well-defined product, however there is the allowance within these for a variance in the event there are incentives attained through project incentives achieved or targets met. There are benefits of this type of contract to both the buyer and the seller, and these are similar to those for the fixed price incentive fee contract. To the seller, it is beneficial because it typically allows for the seller or provider to charge a reasonable base fee, yet also allows for exceptional performance to be rewarded further. However, for the buyer that also provides a very tangible benefit. The buyer typically will be paying a very reasonable base fee up front, but there is of course the chance that the price will go up in the future if certain conditions are met.
Why is incentive fee contract beneficial?
To the seller, it is beneficial because it typically allows for the seller or provider to charge a reasonable base fee, yet also allows for exceptional performance to be rewarded further.
What is lump sum contract?
Lump-sum contracts are the most favourite contract type used in the construction industry. Also known as fixed-price contracts. Because in these contracts, the contract price is fixed and agreed at the initial stage. In industry, this contract type is recognizing as one of the safest contract types for clients. But the Contractor’s responsibility and risk are very high in fixed-price contracts.
What is fixed price contract?
In fixed-price contracts, the Contractor is evaluating the value of work as per the documents available. Mainly price will determine based on specifications and the drawings.
What is the primary condition of a fixed price contract?
The primary condition of this contract type is that, agreed budget should not alter (without any changes to the design or specs). Also, the quality and the standard of the project should keep according to the documents provided at the tender stage ( quality cannot deviate without prior approval of the Client). These are all the critical characteristics of the fixed-price contracts. But the Contractor is providing the rates and quantity breakdown for the fixed price.
Can the client pay for early completion of a project?
In some exceptional cases, The Client may agree to pay additional compensation for the early completion of the project.
Can lump sum contracts create disagreement?
But lump-sum contracts can also create large disagreement and entitlements from contract documents. The following are general factors that can arise:
What Is a Lump Sum Contract?
Under a lump sum contract, also known as a stipulated sum contract, the project owner provides explicit specifications for the work, and the contractor provides a fixed price for the project. These contracts require the owner to complete the project’s plans, designs, specifications and schedule before the contractor can establish a price. The contractor then estimates the costs of materials, tools, labor and indirect costs such as overhead and profit margin and provides a quote.
How to modify a lump sum contract?
To modify a lump-sum contract, project owners must submit a change order document that the contractor must approve along with any price changes. That makes lump-sum contracts somewhat inflexible, but they provide a reliable price for owners and reliable revenue for contractors, making them one of the most popular types of construction agreements.
What are the benefits of lump sum contracts?
The owner can expect the project to be completed within budget and often more quickly so that the contractor can maximize resources and save on labor costs. Lump sum contracts also render little financial risk for owners as ...
What are the advantages and disadvantages of lump sum contracts?
But what are the advantages and disadvantages of a lump sum contract? Advantages for owners include simplified accounting and little financial risk, and disadvantages include rigidity in project scope and a need to have every detail planned before beginning the project.
What is provisional sum?
The provisional sum is included as a separate estimate within the contract and only changes if the owner decides it’s a good idea to move forward with the elective work.
What is a cost plus fee contract?
A cost-plus-fixed-fee contract where the contractor is paid a base amount independent of the final project cost.
What is unit price contract?
For unit price contracts, the price is based on the estimated per-unit cost of the materials and is divided into stages, usually by construction trade (e.g., carpentry, electric, plumbing and more). For this reason, unit price contracts are standard in subcontracting agreements. Many painting contracts, for example, follow a unit-price structure as painting is generally charged on a square-foot basis.
What is a lump sum contract?
A lump sum contract, also known as a “stipulated sum contract,” is a construction agreement in which the contractor agrees to complete the project for a predetermined, set price. Under a lump sum agreement, the contractor submits a total project price instead of bidding on each individual item.
What happens when a contractor uses a lump sum contract?
When a contractor uses a lump sum contract at the outset of the project, they build a bit of insurance into the total price. This insurance protects them from expected but unforeseen contingencies.
What happens when a lump sum project runs over budget?
When a lump sum project runs over budget, the contractor shoulders any cost overruns. The owner doesn’t pay more if material prices skyrocket. If an issue comes up requiring additional material or labor, the price doesn’t change. All of these extra costs are the contractor’s responsibility.
Why do contractors like lump sum contracts?
The contract documents clearly state the work in question and how much money the contractor expects at the end of the project. Contractors like lump sum contracts because they provide some autonomy and freedom to complete the job.
Why do contractors need to pay a lump sum?
Because a lump sum contract features one overall price, without consideration of the actual costs, the contractor had better get that price right. The sum comes from comprehensive plans, detailed construction specifications, and a little bit of trust.
What is the benefit of cost plus contract?
This can lock up a lot of cash in a hurry. The benefit of a cost plus contract to a contractor is that they’ll receive reimbursement for any and all costs on the job. Changes don’t affect their profit nearly as much as they do with a lump sum agreement.
What is a fixed price contract?
On federal government projects, many projects operate under a fixed-price contract, which is very similar to a lump sum agreement. The government prefers these contracts, believing that they are the best way to use taxpayer dollars for acquisitions and projects.
What Is a Fixed-Price Contract?
Fixed-price contracts, also known as firm-price or lump-sum contracts, are agreements in which the two parties state the goods or services one party will provide and establish the price the other party will pay for them. In some ways, they’re similar to the prices of goods at the grocery store. The amount indicated on a loaf of bread is the price the consumer pays — with the addition of taxes in many cases.
Why are fixed price contracts important?
In fact, fixed-price contracts provide the seller an incentive to closely manage costs and schedule to minimize the risk of losing money on the deal. Disadvantages: While fixed-price contracts can be simpler to manage, they come with risks.
Why are FP-EPAs suited for contracts that extend for multiple years?
Because FP-EPAs allow for adjustments to the contract price, they’re often suited for contracts that extend for multiple years.
Why is cost plus contract better?
And because the seller knows their costs will be covered, they have less incentive to cut corners. Cost-plus contracts can be quicker to implement. That’s because it’s not as critical that all elements of the project be pinned down ahead of time, as is prudent with fixed-price contracts.
What is the most suitable contract type?
The most suitable contract type will vary for each project, depending on its scope and risk, the degree to which costs can be confidently estimated in advance and the relationship between the parties. While sellers generally take on more risk with a fixed-price contract, they also can reduce this risk by outlining all steps and materials required and including a contingency amount. No matter what type of contract governs a project, all parties should have a solid handle on terms and responsibilities.
What is the consideration when setting up a contract?
Another consideration when setting up contracts is payment terms. Not only can it affect the cash flow of your business, but there are also other tax and compliance issues to keep in mind. For example, if your company follows accrual-basis accounting, revenue will be recognized when it’s earned — or when your business performs the actions that entitles it to incur the revenue. This means even if payment is handled before the project begins or comes in well after it’s complete, the revenue will be recognized in the period it is earned. If you follow cash-basis accounting, this will not be the case. Regardless of your processes, it’s important to include in your contract when payment will be rendered, and then plan accordingly.
What is included in a cost plus contract?
The costs included in a cost-plus contract typically include the labor and materials directly used in the project and indirect costs like insurance. If the project requires more materials or labor than expected, the price will increase accordingly.
What is lump sum contract?
Lump sum contracts. Lump sum contracts, also known as fixed price contracts, are the most basic type of construction contracts. That’s because they outline one fixed price for all the work done under them. For this reason, lump sum contracts are extremely common in construction.
Why are lump sum contracts risky?
As you can see, lump sum contracts involve a fair amount of risk for contractors because they don’t account for unexpected costs or delays after the project is started. Missteps mean you make less money, or, even worse, lose money on a project.
Why are unit price contracts useful?
Unit price contracts are useful for projects in which the work is repetitive, heavily dependent on material costs, and the amount of work needed isn’t clear before the project is started.
Why do contractors use cost plus contracts?
That’s because the contractor is paid for all costs incurred during the project, and any unforeseen expenses come out of the owner’s pocket . For that reason, cost-plus contracts are best suited for projects in which a lot of creative flexibility is needed.
What are the costs covered by cost plus?
The costs covered by cost-plus contracts can involve direct costs (i.e. direct labor and materials), indirect costs (i.e. office space, travel, and communication expenses), and profit (i.e. the agreed upon fee or markup).
What is agile contract?
Time and materials contracts are agile. Since the customer reimburses the contractor for the cost of materials and pays an hourly wage, unexpected delays, roadblocks, and other changes to the scope of work are covered.
What does it mean to finish a project under budget?
Finishing under-budget means high profit margins. Because the price for the project is set in stone, finishing under-budget means you pocket the savings.
