A lump sum contract is a type of agreement wherein one party pays the other a set amount for completing the total amount of work or providing all the goods specified in the agreement. The main characteristic of a lump sum contract is that the contractor generally isn’t required to provide a detailed breakdown of costs and expenses. Instead, they are paid for completing the overall terms of the contract.
A lump sum contract may be used where the contractor is able to provide an accurate estimate of the costs of the project, including the schedule and the scope of the entire project.
Thus, such contracts help to reduce disputes or breaches of contract, since there are less detailed terms to work with. On the other hand, both parties need to demonstrate some amount of trust, as the payments are made according to completion rather than by specific details.
The term “lump sum contract” is sometimes used interchangeably with the term “fixed price contract”. However, a fixed price contract may sometimes involve a detailed cost breakdown. Lump sum contracts are different from lump sum awards, which are issued in some personal injury cases.
Lump sum contracts may be appropriate for projects or services that involve repetitious performance of the same or similar tasks. Rather than go through the details of each step of the project, the contractor is paid based on completion of all the work. Some examples of projects where lump sum contracts may be used include:
- Installations of computers or computer programs in a business
- Construction of multiple buildings or structures
- Consultations that are ongoing or involve multiple assessments
Thus, instead of paying the contractor an individual fee for each installation or construction, they are simply presented with an overall bill for the project once all the work is completed. This also allows for some adjustment if additional units or installations are needed throughout the course of the project.
While lump sum contracts are considered “fixed-price” agreements, they can still be subject to adjustments, according to the requests and needs of the parties. For example, if the cost of materials rises during the construction, the total lump sum fee may be adjusted accordingly. However, the contract should contain a provision that addresses any adjustments to pricing.
As a general rule, the contractor may not receive more than what the contract specifies. On the other hand, they both parties may sue for breach of contract for over/under charging that is considered unreasonable or illegal.
Lump sum contracts usually involve large projects with multiple components. As such, it’s usually best to have a lawyer draft and edit a lump sum contract, since they can often be complicated. An experienced contract attorney can assist you during negotiations, and can go over the contract with you before you sign it. In the event of a lawsuit, your attorney will be able to represent your interests during court proceedings.