L Lump Sum Contract vs Fixed Price-are they truly the same? The differences between these contract types are significant. Understanding their unique characteristics can help project owners avoid confusion.
The defining feature of a lump sum contract is the single, fixed total price. In this setup, the contractor assumes the primary risk of any cost overruns.
A Lump Sum Contract (A type of Fixed Price Contract): Pricing: A single, predetermined price for the entire project (the lump sum) Risk Allocation: The contractor assumes most financial risks for cost overruns. Scope Definition: Requires a highly detailed and well-defined scope of work before starting. Transparency: The contractor typically doesn’t disclose profit margins.
The contract should establish a payment schedule linked to project milestones. The lowest bid isn’t always the best value, especially with a fixed price lump sum contract.
The problem of how to make the most of a large amount of money. The problem of making the most out of a small amount of cash. The difficulty of making sure that the money is spent wisely.
A lump sum contract involves a single fixed price. A GMP contract sets an upper limit on the price. If the actual project cost comes in below the guaranteed maximum price, the client often shares the savings with the contractor.
It is highly advisable to have an attorney review any significant contract, especially one as detailed as a lump sum agreement. Legal counsel can help clarify terms and conditions, ensuring the client's interests are adequately protected.
