The Lump-Sum Contract
Traditionally, this type of contract is used in low-cost projects. The contractor in this arrangement will be implementing the project at a fixed rate. Therefore, the drawings and specifications must be clear because this contract does not have a calculation of the quantities. Thus, with any change in the site, the amount of variation cost may become difficult to determine. This is a circumstance that can drag out negotiations between the contractor and the owner, possibly disrupting the entire project.
This form of contract is nowadays elaborated as a turnkey arrangement that outlines the engineering, procurement and construction (known as EPC) all in one place at the same time. It stimulates vigorous competition among contractors particularly in the area of project design. This stems from the fact that this factor by itself can significantly reduce the total cost of a project. The benefits of such a development are bound to redound to the owner, who can hope to start realizing profit from the project’s coming into actual operation that much sooner with lowest price.
Another important aspect of the Lump-Sum Contract is the possibility of subdividing major items of expenditure or major mile stones, for example the purchase and-or supply and-or installation of machinery onsite. In this case, a contractor may be interested to partition this cost into one figure representing the cost of providing the concrete base for the machinery, another for performing the mechanical work on the equipment, another for supplying / installing the machine and finally a figure representing the cost of attaching it externally to some source of electric power. By thus breaking down the price of each component item of activity separately in this way, the contractor and project owner may be able to give themselves room to negotiate their way around the effect of some unexpected price increase in any one of these items.
Some contracts also have an appendix that contains the price of labor per day or materials that is known from experience to be likely to cause an increase or decrease in this activity.