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Contracts and contract management
Published in J.C. Edison, Infrastructure Development and Construction Management, 2020
A lump sum contract is a contract in which the final quantities are computed and the final price to be paid is determined by adding to/deducting from the contractor’s accepted tender price, the value of variations and other specified items (such as provisional quantities and contingency items). It is also customary for contracts for plant and equipment and small construction works to be awarded a lump sum based on specifications and drawings (rather than quantities). Traditionally, every civil engineering works is contracted on an estimated quantities and remeasurement basis. Lump sum contracts are used for standard plans such as houses with standard-type plans and multiple numbers where the contractor agrees to execute a complete work with all its contingencies in accordance with the drawings and specification for a fixed sum. In such contracts, all detailed drawings and specifications need to be specified to avoid future claims. Extra rates for foundation works below a certain depth are quoted separately.
Cost Management
Published in Yan Tan, Large-Scale Construction Project Management, 2020
A lump sum contract is also known as a “fixed price” contract. The Contractor and the Employer agree the fixed price for the Contractor to complete the project. The price is generally estimated by the Contractor during the tender stage, which may involve some assumptions that the Contractor made in its estimation. The Contractor bears the risk of changing the assumptions during its estimation, unless it constitutes a change, which can then be claimed from the Employer. The Contractor bears more cost risk in this type of contract. Such contract will incentivize the Contractor to undertake thorough cost control as well as waste reduction action, e.g., through lean construction to increase profits. On the other hand, the Contractor normally includes a high percentage contingency to cover the potential risks it is responsible for. In a lump sum contract, the Contractor bears the risks of quantities. For example, in Sharpe v San Paulo Railway (1873) LR 8 Ch App 597, the Contractor had to bear the cost of the additional quantities even though it was doubled from that estimated in the tender.
Planning the Small Project
Published in Richard E. Westney, Computerized Management of Multiple Small Projects, 2017
Advantages of lump sum The theoretical advantages of the lump-sum contract are: Competitive pricing: In market conditions characterized by good competition, the lump-sum approach can result in the lowest-possible price being obtained, as contractors may be motivated to cut profit margins while maximizing performance. With a lump-sum contract, the contractor has an incentive to perform in a cost-effective manner.Reduced risk to the client: Because the final cost is known in advance, the risk of cost overrun is theoretically eliminated. Any overruns should be to the contractor’s account.Reduced control required by the client: Since the price is fixed, no cost control is necessary
Managing construction risk with weather derivatives
Published in The Engineering Economist, 2021
David Islip, Jason Z. Wei, Roy H. Kwon
A lump sum contract fixes the contractor’s payout irrespective of the actual cost, which means if, e.g., the contractor is under budget then the savings will go to the profit for the contractor. The fixed lump sum payout is the sum of a risk-adjusted estimate of the contractor’s cost and a markup, resulting from the bidding stage. A lump sum contract is used when the plans are detailed and accurate (Hendrickson, 1989; Hughes et al., 2015; Surahyo, 2018). When the quantities of work required for the project are uncertain, the owner may opt for a unit price contract, whereby the owner estimates the amount of work to be completed in terms of units and the bid for project is prepared by the contractor based on their estimated prices per unit. In the end, the owner pays the contractor based on the number of units performed multiplied by the agreed upon rate (Surahyo, 2018). In this case, the owner is taking the estimation risk and the contractor is taking the risk of spending more than the agreed upon unit price to accomplish the work.
Optimal concession contract between a port authority and container-terminal operators by revenue-sharing schemes with quantity discount
Published in Maritime Policy & Management, 2021
Concession contracts can be classified into a lump-sum, annual rent, revenue sharing, and mixed policies. The lump-sum contract is a traditional type of contract, in which a fixed amount of money is paid in one installment or a series of payments over time. Korean port authorities have used lump-sum type contracts for infrastructure, dredging, breakwater, and water channels (Lee and Lee 2012). In the annual rent scheme, a container-terminal operator who leases a container terminal from the port authority pays a fixed rental fee every year. This scheme is also one of the many popular schemes. Chen and Liu (2014) called the annual rent scheme the fixed fee scheme.