Lump sum or firm, fixed price contracting is used on some federal government contracts, and less so with highway work. A common lump sum application is straightforward commercial projects.
How it works:
- A contractor provides a firm price to an agency to perform a job based on the scope of work, specifications, and drawings.
- No individual items are bid and instead the contractor’s price is a fixed, lump sum fee to perform all the work as described. Contractors are on the hook if their actual self-perform or subcontracted costs exceed their estimates. Note that this is drastically different than Guaranteed Maximum Price (GMP) structure.
- Contractors submit a monthly bill paid based on the project percentage complete.
What are some “must haves” for a successful lump sum arrangement?
- A clear, tightly defined scope of work and drawings.
- Owners must know exactly what they want and have documents to support that vision.
- Contractors must have cost visibility into the future.
What does not work well with lump sums?
- Owners that need to make a lot of changes on the fly. This is costly to the owner and requires the contractor to spend time and effort on change orders.
- If there is significant variability or vagueness in the scope of work. This may lead to an adversarial relationship between owner and contractor because the contractor will likely be (and should be) asking for change orders on anything outside the original defined scope of work
Considerations
- There is no overrun protection for the Contractor, unless a change order is approved, like unit price contracts. A contractor’s takeoffs must be dead on.
- Questions must be asked about everything that is unclear by the Contractor before the bid, which is a lot of work.
- Owner’s risk is limited if there are no significant changes. Owners know what the job will cost them upfront.
- Contractors own much of the risk in escalations, labor issues, unforeseen problems, and even omissions. Owners must pay contractors a premium to bear all that risk. This may result in a higher price even though it is a lump sum.
- Owners earn no visibility into a Contractor’s profits. And a contractor is not necessarily incentivized to come up with innovative ways to save the owner money.
- Contractors must be vigilant in documenting and tracking any and every change order.
- Contractors do not owe the owner any backup on work performed unless there a change.
- Credits can be tough, as there are no unit prices to settle added or deleted scope, unless specifically included in the Contract.
In summary, lump sum with a poorly defined scope is a recipe for disaster. Even well-defined scope situations don’t necessarily create much harmony between owner and contractor. Plans should be near 100% complete before the work begins. Lump sum is thought of today as “old school” and frankly works best in the simplest of projects. Added project complexity may require a different approach to improve project outcomes for owners and contractors.
We appreciate you reading our post and welcome your feedback! At Edgevanta, we are building a platform to help contractors maximize their competitiveness in the project acquisition process.
Sincerely,
Tristan Wilson
CEO and Founder
Edgevanta, LLC
