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    5 Pros of Lumpsum Contract

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    Mohamed El Abany
    This document discusses the pros and cons of lump sum (fixed price) contracts. It notes that lump sum contracts minimize risk for the client but maximize risk for the contractor. The contractor takes on responsibility for completing the project at a fixed price regardless of any costs incurred, so risks like low productivity, delays, or incomplete specifications could lead to losses. However, lump sum contracts provide price certainty for the client, allow for predictable cash flow and payment planning, and incentivize early completion with potential bonuses. The document examines key aspects of lump sum contracts like contractor responsibilities, the importance of complete design documents, the payment process, and potential issues with changes or variations from the original scope of work.

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    5 Pros of Lumpsum Contract

    Uploaded by

    Mohamed El Abany
    206 views3 pages
    This document discusses the pros and cons of lump sum (fixed price) contracts. It notes that lump sum contracts minimize risk for the client but maximize risk for the contractor. The contractor takes on responsibility for completing the project at a fixed price regardless of any costs incurred, so risks like low productivity, delays, or incomplete specifications could lead to losses. However, lump sum contracts provide price certainty for the client, allow for predictable cash flow and payment planning, and incentivize early completion with potential bonuses. The document examines key aspects of lump sum contracts like contractor responsibilities, the importance of complete design documents, the payment process, and potential issues with changes or variations from the original scope of work.

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    5 pros of Lumpsum Contract

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    This document discusses the pros and cons of lump sum (fixed price) contracts. It notes that lump sum contracts minimize risk for the client but maximize risk for the contractor. The contractor takes on responsibility for completing the project at a fixed price regardless of any costs incurred, so risks like low productivity, delays, or incomplete specifications could lead to losses. However, lump sum contracts provide price certainty for the client, allow for predictable cash flow and payment planning, and incentivize early completion with potential bonuses. The document examines key aspects of lump sum contracts like contractor responsibilities, the importance of complete design documents, the payment process, and potential issues with changes or variations from the original scope of work.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    206 views3 pages

    5 Pros of Lumpsum Contract

    Uploaded by

    Mohamed El Abany
    This document discusses the pros and cons of lump sum (fixed price) contracts. It notes that lump sum contracts minimize risk for the client but maximize risk for the contractor. The contractor takes on responsibility for completing the project at a fixed price regardless of any costs incurred, so risks like low productivity, delays, or incomplete specifications could lead to losses. However, lump sum contracts provide price certainty for the client, allow for predictable cash flow and payment planning, and incentivize early completion with potential bonuses. The document examines key aspects of lump sum contracts like contractor responsibilities, the importance of complete design documents, the payment process, and potential issues with changes or variations from the original scope of work.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 3

    5 pros & cons of Lump sum Contracts/Fixed

    price Contracts (with video explain)


    Leave a Comment / Contracts / By raoneqs
    Table of Contents
     What is a Lump sum contracts or Fixed price contract
     What are the advantages and disadvantages of Lump sum contracts/Fixed price contracts?
    o Advantages of lump-sum contracts/Fixed price contracts
    o Disadvantages of lump-sum contracts/Fixed price contracts
    o More insight on lump sum contracts/fixed-price contracts

     What are the Contractor’s tasks and responsibilities of lump-sum/fixed-price
    contracts
     Below are the critical characteristic of lump sum contracts
     Design changes and specification changes
     The payment process of fixed price contracts
     Fixed price contracts-Additional tips
     Order Variation
     Additional benefits of lump sum contracts,
     Early Achievement

    What is a Lump sum contracts or Fixed price contract


    Lump-sum contracts are the most favourite contract type used in the construction
    industry. Also known as fixed-price contracts. Because in these contracts, the contract
    price is fixed and agreed at the initial stage. In industry, this contract type is recognizing as
    one of the safest contract types for clients. But the Contractor’s responsibility and risk are
    very high in fixed-price contracts.
    Let me explain the main advantage and disadvantages of lump-sum contracts (fixed-price
    contracts).

    What are the advantages and disadvantages of Lump


    sum contracts/Fixed price contracts?
    Advantages of lump-sum contracts/Fixed price contracts
     Client’s risk is minimal.
     Fewer variations
     The Client can arrange capital according to the payment plan.
     Contractors cash flow is predictable.
     The tendering process is more transparent and impartial.
    Disadvantages of lump-sum contracts/Fixed price contracts
     Contractors risk is high (ill productivity and mismanagement can lead the project into
    a loss)
     Improper details and specs in the design can lead to project disputes.
     Delays in the Client’s financing can delay the project as well.
     The design should be complete and available before the pre-contract process.
     Procurement time can be high.
    For more insight about lump sum contracts, See our explainer  video  also for more insight.
    VIDEO-5 pros & cons of Lump sum Contracts/Fixed price Contracts
    More insight on lump sum contracts/fixed-price contracts
    What are the Contractor’s tasks and responsibilities of lump-sum/fixed-price contracts
    In fixed-price contracts, the Contractor is evaluating the value of work as per the documents
    available. Mainly price will determine based on specifications and the drawings.

    Moreover, the Contractor should request any missing information or documents before
    submitting the price. If not, the Client expects the contactor to allow a budget for all this
    missing information. After evaluating and reviewing these documents, the Contractor is
    agreeing to complete the works without exceeding the agreed fixed price. Under a lump-
    sum agreement, it is the responsibility of a contractor to implement the appropriate work.
    He should also offer suitable resources and techniques to accomplish the task.
    Below are the critical characteristic of lump sum contracts
    The primary condition of this contract type is that, agreed budget should not alter (without
    any changes to the design or specs). Also, the quality and the standard of the project should
    keep according to the documents provided at the tender stage( quality cannot deviate
    without prior approval of the Client). These are all the critical characteristics of the fixed-
    price contracts. But the Contractor is providing the rates and quantity breakdown for the
    fixed price. 
    Design changes and specification changes
    Client and client’s representatives will intensively check design and specification at the
    construction stage. In lump-sum contracts, the contractor can’t change specs or design
    without proper approvals. But the contractor can propose design change as a value
    engineering option. Based on contractual terms, contractors may charge eligible
    percentage fees from saving offered from value engineering option.
    The payment process of fixed price contracts
    Contractor and client agree on a project program before commencing the works. Project
    milestones will decide based on the project program. Concerning this program, A payment
    schedule will agree between both parties. Upon successful completion of each milestone,
    the client will release the agreed amount based on the payment schedule.

    In some exceptional cases, The Client may agree to pay additional compensation for the
    early completion of the project.

    Fixed price contracts-Additional tips


    Apart from the fixed price, The Client may also be agreed to pay fluctuation of the material
    costs separately. But the losses due to low productivity and losses due to material delays
    should be bare by the contractor.
    But lump-sum contracts can also create large disagreement and entitlements from
    contract documents. The following are general factors that can arise:
    Order Variation
    When the holder creates or notes an order variation bidding from the contractor, the price
    citation can become unclear. The holder may also submit the plea that the required
    variation was initially controlled under contract requirements. To formulate particular
    contract clauses mentioning the method to control the order variation are necessary. 
    Additional benefits of lump sum contracts,
    Early Achievement
    Lump-sum contracts may consist of early achievements return for the contractor. These
    early achievements can create the highest revenue for the project holder. 

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