A lump sum contract is a specific type of contract agreement where the party that agrees to perform services under terms of the contract, agrees to complete the entire project for a fixed amount. A lump sum contract may also be referred to as a fixed price contract.
In legal terms, the term contract refers to a legally enforceable agreement that is made between two or more parties. It is important to note that contracts may either be written or oral. However, in order for most contracts to actually be legally enforceable, the contract must be made in writing and signed by both or all parties involved.
Once again, in a lump sum contract, the price term of the contract is set for a defined amount or stipulated sum. For example, in a lump sum contract agreement for a construction project, the contractor agrees to handle the entire construction project for a predetermined cost agreed upon by both parties. Then, in general, that agreed sum cannot be changed after the project has begun.
It is important to note that despite the name lump sum contract, the lump sum term only refers to the project’s cost rather than the contract payment terms. This means that lump sum contracts may still be paid in installments. For instance, in the previous construction project example, the contractor may be paid either on a monthly basis or when the certain project milestones have been met.
One of the main characteristics and advantages of a lump sum agreement is that the party hired to perform the contract is not required to provide a detailed breakdown of costs and expenses. Instead, the party that is contracted for the project is paid for completing the overall terms of the contract.
However, in order to reach an agreement upon a lump sum for a contract, the party bidding for the project will still need to consider a variety of different factors, including:
- Labor Costs: Contractors will need to consider the expected labor costs for completing the contracted project.
- Labor costs may include costs related to the contracted company’s workers salary and expected labor costs for subcontractors, or other third parties that contractors might use to complete the project;
- Material Costs: Contractors will also need to consider the materials they expect to use while completing their tasks.
- Material costs may include things such as raw materials and construction tools;
- Overhead Costs: Contractors will also consider the project’s overhead costs, which are expenses that don’t directly relate to completing a construction project but still contribute to the contractor’s operations, such as:
- Insurance costs;
- Administrative costs;
- Employee perks and benefits; and
- Certain employee salaries; and
- Profit Margin: Finally, after accounting for all of the above costs, contractors will need to consider whether their profit margins are favorable and balance their profit margin with being competitive with other people bidding for the contract project.
How Are Lump Sum Contracts Created?
Once again, lump sum contracts are a specific type of contract. As such, forming a valid lump sum contract will require all parties to follow the laws of their state concerning the formation of legal contracts.In general, in order to form a legally enforceable and valid contract, there must be:
- An Offer: One party must make an offer to enter into an agreement;
- Acceptance of the Offer: After an offer has been made by one party, the acceptance of the offer must then be expressed by another party.
- It is important to note that acceptance of an offer may also be implied, such as a business owner accepting items that were delivered to them;
- Intent: Intent refers to the determination of parties to enter into an agreement and act or perform in a particular manner;
- Importantly, if one party did not intend to enter into the contract or lacked the capacity to enter into the contract, then the contract may be void or voidable; and
- Consideration: The term consideration refers to the exchange of valued goods or services.
- In general, consideration is a monetary payment.
If any of the above elements is missing, then a contract may not be enforceable because the law will consider that there is no contract to be enforced. In addition to the elements required to form a valid contract, there are also some key elements that are generally present in a lump sum contract, including:
- Scope of Work: A lump sum contract will always outline the specific tasks that the contracted party is responsible for completing.
- A detailed scope of work is important, because if the scope of the project changes, the parties subject to the lump sum contract may be able to renegotiate the price term of the contract;
- Project Timeline: Lump sum contracts will also detail the timeline for completion of the project;
- Price Terms: Lump sum contracts will also state the fixed price that the two parties agree upon to complete the project; and
- Payment Terms: Finally, lump sum contracts will also state at what points the contracted party will be paid, whether it be upfront, monthly, or upon the completion of milestones.
When Are Lump Sum Contracts Used?
There are many scenarios in which a lump sum contract is ideal for a construction project. In fact, many professionals utilize lump sum contracts when:
- Project owners are able to clearly define the project;
- The project is straightforward in terms of the expected costs to complete the project.
- For instance, contractors are able complete the construction project in a simple and linear manner with a minimal chance of unforeseeable issues; and
- Contractors are able to fully outline a cost estimate for the project.
Examples of common projects where lump sum contracts may be used include:
- Installations of computers or computer programs within a business;
- A construction project involving the construction of multiple buildings, such as a residential development; and
- A road construction project; and/or
- A renovation project involving a commercial space.
Once again, a lump sum contract may allow for some adjustment if the project owner changes the scope of the project by requesting additional units or installations.
Can Lump Sum Contracts Be Subject to Adjustments?
Although lump sum contracts are considered fixed-price agreements, lump sum contracts can still be subject to adjustments according to the requests of the project owner and needs of both parties.
For example, if the cost of raw materials unforeseeable rises during construction, the total lump sum fee may be adjusted accordingly to make the contract performable. Another example is where the scope of the project changes, such as the project owner requesting an additional renovation or build.
However, any lump sum contract should contain provisions that address each parties ability to make adjustments regarding the agreed upon price. Typically, these provisions will provide that in order to make changes to a lump sum contract, the party must submit an early warning and change order form.
Importantly, as a general rule, the contractor must perform their duties under the contract for the price that was agreed upon. If either party does not perform their duties under the contract, then the party that breached the terms of the contract may be sued and held accountable.
Do I Need a Lawyer for Assistance with a Lump Sum Contract?
As can be seen, lump sum contracts are commonly utilized in many different industries for many different projects. As such, if you are having any issues related to a lump sum contract, such as drafting a favorable lump sum contract, it is in your best interests to consult with an experienced contract attorney.
An experienced contract lawyer can assist you during contract negotiations, and can ensure that your interests are being protected in the contract. Further, should one party breach the terms of the contract, an attorney can also represent your interests in the breach of contract action that will occur. Finally, an attorney can also represent you in court, as needed.
