Lump sum contracts

A lump sum price may be called for, or a series of lump sums. This is best suited to easily defined, relatively simple constructions, involving little below-ground work. However, some quite large above-ground constructions are paid for by lump sum. Sometimes a separate section of the bill for pricing allows for the foundation work of a building to be paid for ‘on measure’.

In some kinds of civil engineering work the lump sum payment method can pose serious risks upon a contractor, causing him to add a substantial sum to his tender. This is particularly so for design-and-build or ‘turn-key’ projects where the contractor has to undertake detailed design as well as construction. The employer has to pay these additional sums whether or not any risks materialize.

A disadvantage is that an employer may have to pay a high price for any alteration or addition he wants to the project, because the contractor is only committed to undertaking a fixed amount of work for the fixed payment. Payments under lump sum contracts are usually made in instalments as set out in the contract according to stipulated stages of completion, or linked to a programme or activity schedule.