Understanding a Lump Sum Contract
When deciding to undertake refurbishment, extensions or new build work, one of the key issues for the majority of clients is the control of costs and expenditure associated with the work, and with the majority of this being the cost of actually undertaking the physical work, the correct approach to procuring the works is critical.
As a Building Surveyor and Project Manager one of the key responsibilities is advising the client on the best method of procurement, with the majority of works undertaken on a lump sum or fixed price building contract.
What is a Lump Sum Contract?
Fixed Price Contracts are not as they may sound, a guaranteed price for the work and can be confused for contracts referred as Target Price and Guaranteed Maximum Price Contract. These types of contract will give a certainty on cost but as they generally place the burden of risk upon the contractor will be factored into their price they will be prepared to undertake the works for, with this likely to increase the overall cost incurred by the client.
A Fixed Price Contract is better defined as agreed costs for elements of works for the extent and quantity defined within the documentation the contractor will be pricing and therefore the price included in the contract is likely to differ from the final costs paid by the client. However if this is carefully managed by a consultant it should not an increased cost in the anticipated price.
A Fixed Price Contract will generally allow for elements of works to be unpriced (usually with a provisional sum included against the item) and for variations to the extent of works to be made if required by the client in adding to or omitting any of the works. Provisional sums will also be included where the extent cannot be quantified prior to commencing the overall works.
A typical Fixed Price Contract will also allow inclusion for provision for the contractor to claim for extra costs where elements are outside of his control, with a good contract prescribing how these are controlled and managed. These unknowns will include things such as “Acts of God” or inclement unforeseeable weather (such as significant snow showers in April), fluctuations in inflation and cost (generally included where contracts are of a longer period), delays to the works outside of the contractor’s control (such as delays in information being provided) and variations to the works by the client.
In allowing the contractor the flexibility to claim for these types of unforeseen matters, the risk element is removed and thereby the contractor is more comfortable to provide a true cost for the extent of works.
The Fixed Price Contract will also benefit the client as they would be able to make variations to the extent of the work, both adds and omits with costs for these being valued against prescribed requirements, and it will also still provide a clear anticipated cost for the works subject to resonable parameters.
The client will generally remain protected against contractors’ delays, negligence, delayed completion and non performance of the works, with clear control mechanisms within the contract ensuring costs for variations aren’t inflated unreasonably.
Variations are inevitable when undertaking works and result in the majority of contract disputes that occur in relation to works. This is why we recommend to ensure that the initial specification of works is as detailed as possible to avoid these costs. The benefits of qualified and experience consultants advice and assistance in the procurement and management of contracts is invaluable and in many cases, especially on the larger projects this will be in conjunction with expert legal advice and in the main we would always anticipate to minimise the overall project cost associated with undertaking works.
For advice and assistance on all the stages of a building project, from inception through to completion, Paul would be happy to help. He can be reached on 0121 455 9455 or via email: paul.wells@harrislamb.com.