Lump-Sum Contract- Advantages, Disadvantages, And When To Use?
In civil engineering, the contract is the legal agreement between two authorized parties in the written format and signed by both the party.
Lump-Sum Contract
The lump-sum contract is a type of contract in which the contractor is present a fixed amount for the execution of the complete project work according to the drawing, design, and specification.
In the lump-sum contract first, the owner or department completes the drawing, design, and specification of the project.
After the completion of drawing, design, and specification by the owner, the contractor presents a single fixed amount for the execution of project work.
If the fixed amount present by the contractor is greater than the total cost of the project then in this situation the contractor got more profit.
And if the fixed amount presented by the contractor is less than the total cost of the project then in this situation the contractor gets the loss.
Let’s dive into the Advantages And Disadvantages Of Lump-Sum Contract-
Advantages Of Lump Sum Contract
The main advantage of the lump sum contract is the total cost of the project work is known before the work begins, so the owner can easily arrange the amount in time.
The second advantage is the contractor tries to complete the project in the minimum possible time because the contractor’s profit lies in the completion time.
In the lump-sum contract, there are no requirements for detailed measurements of the project work.
The contractor is not get paid in between the project work, so the contractor tries to complete the whole project early to get the full payment and go to another project work.
As the work is finished before the time or on the time, in this situation the owner also gets benefited.
In the lump-sum contract, the contractor gets more profit if they finished the work as soon as possible, due to more profit there is more competition among the contractor, the contractor tries to get a contract even at less profit so the total cost of the project decreases.
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Disadvantages Of Lump-Sum Contract
The main disadvantage of the lump-sum contract is the limited amount of addition and changes are possible.
In the lump-sum contract, the owner tries to get more work whereas the contractor tries to finish his work as early as possible for more profit, this causes conflict between the contractor and the owner.
If the fixed amount presented by the contractor is less than the total cost of the project then the contractor gets the loss.
In the Lump-sum contract, the owner or organization must finish the drawing, design, and specification of the project before the beginning of project work.
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When Would You Use a Lump Sum Contract?
The lump-sum contract is suitable to use when the drawing, design, specification, and other documentation of the project is already known. This information is enough for the contract to quote an accurate fixed amount for the project work.
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Frequently Asked Questions(FAQ)
In the Lump-sum contract, the contractor is present a fixed amount for the execution of the complete project according to the drawing, design, and specification.
The lump-sum contract is also known as a stipulated sum contract.
The main advantages of the lump-sum contract are the total cost of the project work is known before the work begins, the contractor tries to complete the project in the minimum possible time, no requirements for detailed measurements of the project work, etc.
The main disadvantages of the lump-sum contract are a limited amount of addition and changes that are possible in the project, the possibility of conflict between the contractor and the owner, etc.