In the construction industry, nothing is done without a signed contract in place. Most construction companies are contractors, which means they only do work that is outlined in a contract. As a job owner, you have several options on what type of contract to offer to get your construction project done. The most common type of construction contract is a lump sum contract, and it can be the ideal type of agreement to use in a variety of situations.
What Is A Lump Sum Contract?
According to the construction experts at About.com, a lump sum contract is an agreement where the contractor agrees to do a specific scope of work for a set price. In this type of agreement, the contractor assumes all of the financial risks for the project, which can be a relief to project owners. But things can get unpredictable when unforeseen circumstances arise.
What Are Unforeseen Circumstances?
When a project owner puts together a lump sum contract, they do their best to include every single aspect of the project that will be covered by the lump sum price. But if a necessary project requirement arises that is not part of the original scope, then the contractor will submit a change order to make the new requirement part of the contract.
Change orders can be rejected by the project owner, but that is what usually sparks drawn out lawsuits between contractors and job owners. The job owner feels that the scope in the original contract is comprehensive enough, but the contractor insists that it cannot do the work up to local building codes without change orders.
How Comprehensive Does The Scope Of The Project Have To Be?
One of the drawbacks to using a lump sum contract is that you are not allowing the contractor to use their experience to suggest better materials or methods to complete the project. According to PNLawyers.com, a lump sum contract should outline everything from the processes that should be used, to the materials that can be part of the construction process. If any part of a lump sum contract is left open to interpretation, it could cause a change order that will stop the job in its tracks.
Who Uses Lump Sum Contracts?
Any job owner with a tight budget uses a lump sum contract to try and keep construction costs down. A job owner that has very little construction experience might use a lump sum contract to prevent getting involved in cost issues they do not understand. Most smaller private projects and municipal projects utilize lump sum contracts as well, and contractors must be very careful when estimating their costs and submitting bids.
Lump sum contracts can be excellent ways for organizations with tight budgets to get work done, while keeping costs down at the same time. To learn more about contracting and estimating costs, you can start a course with PDH Contractors and get all of the information you need to be an informed and prepared contractor. PDH Contractors is an excellent resource for contractors looking to do any type of work, utilizing any kind of contract.