Just about any seasoned contractor will tell you which type of construction agreement should be used for a simple job like building a deck adjacent to a one-story house: a lump-sum contract. Also called fixed-price contracts, they’re quite simple: the contractor offers a bid encompassing all expenses for a construction or renovation project, and the owner can take it or leave it. As this blog will cover, there are plenty of pros and cons to this relatively straightforward construction agreement.
Advantage: Price Certainty
The fear of the unknown is quite prevalent for construction owners before the first shovelful of dirt is moved. Fortunately for owners, though, contractors largely assume the risks in a lump-sum agreement. It’s assumed that contractors build a small bit of monetary insurance into the initial bid to cover any surprises. For peace of mind and price certainty, project owners often willingly accept this exchange.
Advantage: Simplified Paperwork
Compared to other types of construction agreements, the paperwork involved with lump-sum agreements is fairly light. Because the project’s price is agreed-upon prior to project commencement, the contractor doesn’t need to submit itemized invoices or justify every expense related to the project. However, this can easily lead to distrust between the contractor and project owner if things go south for the project.
Disadvantage: Lack of Transparency
The vast majority of contractors using lump-sum agreements operate in good-faith. However, there’s seldom a way for project owners to verify that. Because detailed invoices and expenses are not given to the project owner, he or she isn’t able to identify the precise margins for the contractor—and where those margins are coming from.
Additionally, contractors in lump-sum construction projects are generally free to shop around for the least-expensive materials. Again, it isn’t typical for distrust to plague these types of projects, but there is room for distrust to creep in.
Disadvantage: Contractor Assumes Risk
Contractors operating under lump-sum agreements take on a substantial amount of risk. If an unexpected expense arises, the contractors are the ones who will shoulder the burden. That’s why contractors should only take projects with a clearly defined scope of work. Also—the fewer moving parts, the better.
Contractors and construction project owners have a menu of options from which to choose the type of agreement that will shepherd the project through to completion. Lump sum contracts are relatively straightforward agreements, but you need to be sure the project you’re bidding on is conducive to that type of contract. There are also ways to negotiate lump sum contracts to more closely align interests and goals between the owner and contractor. Florida Construction Law Group has extensive experience drafting, negotiating, and reviewing construction contracts and would be glad to help with yours. Call us at 305-227-4030 to discuss your options with our team.