No, fixed-price contracts and lump-sum contracts are interchangeable terms for contracts that offer customers a price for goods and services. Both terms are widely acceptable and are used in the field of housing. Most projects involve disagreements and misunderstandings. Some common types of disputes arise under lump-sum contracts. Once the project was completed, the entrepreneur managed to exceed the budget, which gave her additional benefits. A project owner needs to build a storage shed to increase storage space, so they turn to a contractor for the job. The owner has already completed the design and construction plan, completed the necessary assessments and obtained the necessary permits. In the construction plan, the builder also notes that he wants to use a certain brand of cement. The lump sum contract in construction is one of the construction contracts sometimes called the agreed sum, a single price is offered for the whole project based on the plans and specifications and covers the entire project and the owner knows exactly how much the work will cost in advance. [1] This type of contract requires a complete set of plans and specifications and includes all indirect costs plus profits, and the contractor receives upfront payments less deductibles each month. The flexibility of this contract is very low and design changes or deviations from the original plans would require a change order paid by the owner. [2] In this contract, remuneration is based on the percentage of work performed. [3] The fixed-rate contract differs from the maximum guaranteed price in that the contractor is responsible for additional costs above the agreed price, but if the final price is lower than the agreed price, the contractor will benefit from the savings.

[4] For example, a patio builder can do very well with fixed-rate contracts. The design and drawings are usually simple and remain unchanged throughout the project, defining the scope. The bundle of wood is usually purchased immediately, which minimizes the impact of fluctuations in material prices on the contractor`s bottom line. In case of early conclusion, the contract may contain advantages and incentives. There may also be penalties, called lump sum damages, if completion is delayed. Like lump sums, GMP contracts present a major risk for the contractor. If project costs exceed GMP amounts, these additional costs come from the contractor`s pocket, not the owner`s. Contractors will also often attempt to negotiate GMPs, which could slow down the process. Lump sum contracts can bring benefits to both parties in a construction project. Here are some of the biggest benefits. Let`s go deeper into the pros and cons so you can better understand why these contracts work or don`t work for a particular project. For unit price contracts, the price is based on the estimated unit cost of materials and is divided into tiers, usually by construction (e.g., carpentry, electrical, plumbing, etc.).

For this reason, unit price contracts are the norm in subcontracts. For example, many painting contracts follow a single pricing structure, as painting is typically charged per square foot. In general, it is easier for homeowners to obtain financing with a lump sum contract. Lenders appreciate knowing how much a project will cost once completed. They are more willing to allocate funds to these projects because the entire scope of the project is under a contract with a fixed value. It is important to properly develop a lump sum contract and fill it out to the letter. But what is a lump sum contract in construction? It is a type of construction contract where a single price is used for an entire project. The estimated cost is established once the contractor has understood all the details of the construction project, including specifications, materials and timelines. The proper preparation and execution of a lump sum contract for a construction project looks like this: This type of agreement is quite easy to manage. The owner makes a payment, often monthly, based on the percentage of work completed, compared to the lump sum payment that other agreements have. The designer and contractor often have a higher profit margin than with a cost-plus contract. During negotiations, the designer and contractor propose what they believe to be a fair price without having to justify materials or hourly costs.

Unlike fixed-rate contracts, unit price contracts handle changes quite well. If a major problem arises, the contractor can treat it as an additional unit and provide a price for completion. This allows the owner to make changes at will and work with the contractor to create a better project. It is important to understand that these contracts are not very transparent. The owner is never really sure where the costs are and how much the contractor earns from the project. Entrepreneurs will, of course, hide their margins, and this kind of secrecy follows the payment chain. At any point in the chain, this climate of mistrust can lead to disputes. He understands and accepts that contractors often add costs when pricing a fixed contract.

The owners know that the contractor is taking the risk of the project, so they are willing to spend a little more to calm down. This makes lump sum contracts more expensive than other contract formats. The main condition of this type of contract is that the agreed budget does not change (without changing the design or specifications). In addition, the quality and level of the project must correspond to the documents provided in the offer (quality cannot deviate without the prior consent of the customer). These are all the essential features of fixed-price contracts. However, the contractor shall provide the prices and quantitative breakdown for the fixed price. The paperwork associated with a fixed-rate contract is much less detailed than most other forms of contract. The contractor must provide less detailed bills of materials or provide subcontractor and supplier quotes to the owner.