Lump sum contract

The principal provides drawings, a specification and other contract documents. Contractors tender a single price to deliver that scope, and the winning price becomes the contract sum.

The contractor is paid through progress claims, usually based on the value of work completed each month against a schedule or trade breakdown. If the contractor's actual costs come in higher than planned, it absorbs the difference. If they come in lower, it keeps the saving. The contract sum is only adjusted for things like variations, provisional sums, prime cost items and other events the contract allows.

For a deeper look, read The Rulebook of Revenue: A Guide to Construction Contracts.

AS 4000-1997 and AS 2124-1992 are both construct only contracts that can be used on a lump sum basis or on a schedule of rates basis, with the choice recorded in the annexure. AS 4902-2000 is commonly used for lump sum design and construct work.

Under a schedule of rates arrangement, quantities are measured and paid at contract rates, so the final price can move with the quantities. Under a lump sum arrangement, the contractor carries quantity risk for the scope shown in the documents. Check which basis applies in the annexure and how any bill of quantities is treated.

A lump sum contract gives the principal price certainty and puts cost risk on the contractor. It works best when the design is complete and the scope is well defined.

A cost plus contract pays the contractor's actual costs plus a margin, so the principal carries cost risk but has flexibility when the scope is unclear. Many projects mix the two, using a lump sum for the defined work and provisional sums or cost plus arrangements for uncertain parts.

A lump sum contract works best when the design is complete, the scope is well defined and the site risks are understood. In those conditions contractors can price accurately, and the principal gets a firm number to fund and report against.

It suits less well where the design is still developing, where existing conditions are uncertain, or where the principal expects to make many changes. The contract then fills with allowances and variations, and the fixed price stops giving real certainty.

For contractors, the discipline is in the tender: check the documents for gaps, price risk deliberately, and raise clarifications before the price is locked in.

• Tendering on an incomplete design. Gaps in the documents become disputes over what was in the price. Clarify them during tender.

• Too many allowances. Large provisional sums and PC items undermine the price certainty a lump sum is meant to give.

• Missing variation entitlements. Changes are the main way the price can move. Record directions and price variations on time.

• Not checking scope gaps across trades. Make sure subcontract scopes together cover the whole head contract scope.