A lump sum contract is a type of construction contract where a fixed amount is agreed upon between the owner and the contractor for the completion of a specific scope of work. The lump sum contract is a popular choice for projects with clearly defined scopes because it offers a firm price for the work to be completed. This type of contract is also preferred when the client wants to limit the risks of cost overrun due to design changes, labor issues, or other unforeseen events.
Under a lump sum contract, the contractor assumes the risk of completing the work within the agreed upon amount. The contractor is responsible for any additional costs that may arise during the course of the project, unless they were caused by the client's actions or omissions. The client, on the other hand, benefits from the predictability of the contract price and the assurance that the project will be completed within budget.
Lump sum contracts are typically used for smaller, simpler projects such as residential homes, commercial buildings, and some infrastructure projects. They are less commonly used for larger and more complex projects where the scope of work is not well-defined or where design changes are likely to occur. In these cases, alternative contract types such as cost-plus contracts may be more appropriate.