Lump Sum Contract

Definition

A contract in which the amount to be paid to the contractor is agreed in advance to be a stipulated sum.

Purpose

Lump sum contracts provide clarity and predictability in project costs by establishing a fixed price for the entire scope of work. They are commonly used in construction to define the total payment for a project regardless of actual costs incurred.

Examples of Use

• Building construction: Agreeing on a lump sum for the construction of a residential home.
• Renovation projects: Establishing a fixed price for remodeling a kitchen or bathroom.
• Infrastructure development: Setting a stipulated sum for the construction of a bridge or road.

Related Terms

• Fixed-Price Contract: Another term for a lump sum contract, emphasizing the predetermined nature of the payment.
• Cost-Plus Contract: A contract where the contractor is reimbursed for actual costs plus a fee.
• Unit Price Contract: A contract where payment is based on the actual quantities of work performed at agreed-upon unit rates.

Notes

• Lump sum contracts require detailed specifications and scope of work to avoid misunderstandings and disputes.
• Any changes or additions to the scope typically require change orders, which can affect the total contract amount.
• These contracts are beneficial for both parties when the project scope is well-defined and unlikely to change significantly.