Lump Sum Contract example essay topic

TERMS OF AGREEMENT Contracts should be drafted to ensure that specific topics are addressed. A construction contract should identify the contractor, the owner, and the designer. The scope of work for which the contract is being drawn should also be defined. The project may be defined in a descriptive fashion, along with specific reference to documents such as the construction drawings and specifications. The contract may stipulate that the construction project must be completed by a given date or within a given number of days of the notice to proceed.

Failure to complete the project with stipulated time may result in liquidated damages charged against the contractor. The contract will state how payments are to be made to the contractor. General, payments are made on a monthly basis. However, on small projects the payment for the entire project may occur after the project is completed. On other projects the contractor may be given an agreed sum before construction begins, with the understanding that the final payment will be made after project completion. There are three types of construction contracts are the unit price contract, the cost plus contract, and the lump sum contract.

There is no best form of contract. The nature of the project and the specific needs of the owner will determine the form that is most suited for the project. Finally, the contract must contain the signatures of the contracting parties. UNITS PRICE CONTRACT A contract in which payment is based on a contractor's quoted price per unit of work performed and the owner's measurement of the total number of such units installed. By using this method the owner is not certain of the actual cost of the project until the project is completed. This kind of contract is not suited for major constructions, this type of payment is usually involve with earthwork suck as excavation.

COST PLUS CONTRACT A cost plus contracts is one in which the contractor is reimbursed for most of the direct expenditure associated with a particular project plus allowance for overhead and profit. It is common for the allowance for overhead and profit to be based on a percentage of costs. If the allowance for overhead and profit is reasonable, the contractor is almost assured of not losing money. Many contracts reimburse the contractor for the direct project costs plus a percentage of the costs of overhead and profit. Other payment contract may specify a cost plus a fixed fee. This type of arrangement removes the incentive for the contractor to increase costs in an attempt to increase the overhead and profit allowance.

Payment for work done is a simple matter. The contractor and the owner need simply agree on the validity of the various cost reimbursements that are requested. It is imperative that the contracts clarify which costs will be reimbursed. These contracts are used when the actual cost of a project or portions of a project are difficult to estimate with accuracy. This may occur when the plans are not complete or when the project cannot be accurately portrayed. It also may occur when a project is to be completed with a fairly short time period and the plans and specifications cannot be completed before construction starts.

A cost plus contract, unlike the other forms of contract, does not place the owner and the contractor in an adversarial relationship. However, this form mandates that the contractor be trustworthy. The reason why we did not use this type of contract is that the owner has little idea of what the actual cost of the project will be. Also, the owner must maintain additional staff to monitor the progress of the contractor.

The importance of the staff will be primarily on costs. Besides this contract is based on a fast tracking construction. Project that are not well designed or those which may be subjected to numerous changes during the construction phase, will be affect by this contract. LUMP SUM CONTRACT The lump sum contract is probably the most common type of contract used in the construction industry, particularly in building construction.

Of the various forms of contracts, the lump sum contract is the simplest. The contract basically states that the contractor will produce the project as designed for a stated specific sum. On most large sum contracts, the contractor will be paid on a monthly basis. The contract is simply for the work put in place. The value of the various work items is ideally established before the start of construction.

The contractor is generally asked to break down the project into a variety of work items and to allocate the appropriate payment to be made for each item. This payment schedule will become the basis for all payments throughout the project. Naturally, the sum of all the values must equal the amount stated in the contract as a lump sum. Forms of unbalancing can also occur within a lump sum contract. This arises out of the preparation of a payment schedule in which the contractor manipulates the cost distribution so that the owner pays more for early work items and less for work items that occur later in the project. Since the sum of the items on the payment schedule must equal the contract amount, this unbalancing places less risk on the owner.

However, if the payment schedule is severely unbalanced and the contractor defaults after receiving several periodic payment, the owner is at considerable risks. Thus, it is important that the owner carefully evaluate the schedule of payment submitted by the contractor. If changes are made to the contract, negotiations between the owner and the contractor will establish the payment to be made to the contractor for such work. Thus, unlike cost plus contracts, the cost of each change order must be negotiated between the owner and the contractor. A lump sum contract gives the contractors some latitude to front load billings. Some of the costs will occur early in the project, and the contractor will want to front load on the billings to cover those expenses.

Expense of this sort include insurance premiums that are due at the beginning of the project, permits that must be obtained prior to construction, bond premiums that are paid at the project start, miscellaneous early fees, and mobilisation. Owners with a limited budget prefer this form of contract because it is the only that yields a fairly accurate indication of the project, the amount stated in the contract will be the amount actually paid by the owner. With this kind of construction, lump sum contract is the most appropriate contract. When lump sum contracts are used, the owner has some idea of the anticipated costs.

Therefore we have decided that we are going with the lump sum contract.