Lump sum contracts, also known as stipulated sum contracts, are common in the construction industry. They specify the price of the contract, as opposed to a contract where payment can depend on variations to the project). This figure is obtained after examining the project’s plans and specifications. This article explores lump sum contracts in detail.
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Drafting a Lump Sum Contract
Generally, under a lump sum contract, the contractor will provide specified services and calculate the contract’s price by estimating their labour cost, materials, and any profit they wish to earn.
Contractors will need to make a risk assessment in calculating the final price. Since the contractor stipulates their price, they bear all the risk. If their final quote is too low, they risk losing out on profits or, worse, making a loss. However, on the flip side, the contractor has complete control over selecting their own pricing method and calculating costs.
You can include clauses dealing with variations in lump sum contracts. Variation clauses allow both parties to agree to changes in the contract, including its final price. Typically, the contract will stipulate conditions to make valid changes. For example, the agreement to make a variation must be in writing by duly authorised representatives. If your contract details conditions, parties should closely follow the outlined method to ensure any variation becomes legally binding.
When is a Lump Sum Contract Appropriate?
Choosing a lump sum contract is appropriate where you, as a contractor, can clearly define the scope of your work. This might be where, for example, specifications and plans are complete and calculable. As a contractor, you will want your lump sum contract to specify in full detail the work you are going to complete under the contract.
Continue reading this article below the formBenefits of a Lump Sum Contract
The benefits of a lump sum contract are as follows:
- reduction of administrative costs and processes;
- certainty for both parties – the contractor will get paid a specified amount to do a specific job. Likewise, the customer will receive a lump sum quote upfront, allowing them to calculate this into their budget; and
- independence for both parties – once the contractor has all the necessary information about the work, they can get on with their work with minimal or no reporting requirements and supervision by the customer.
Disadvantages of a Lump Sum Contract
There are also some disadvantages to this type of contract.
- contractor’s risk – the contractor must carefully scrutinise the details of the work and all details provided by the customer in calculating the price. If the actual costs of labour and materials are higher than estimated, the contractor’s profit will be reduced; and
- contract is dependent on the completion of designs, plans and specifications – if the project is time-sensitive, the customer will need to work quickly to make sure all details are provided to the contractor before the contractor can provide a quote. In this case, a lump sum contract could delay commencement of the work.
Security of Payment
Each State and Territory has different laws to regulate payments for construction work in Australia. The purpose of each law is to ensure that any person who carries out construction work or provides related goods and services can recover payment. The laws apply to both lump sum payments and progress payments. It also provides mechanisms for resolving disputes without the need for litigation.
| State | Legislation |
| New South Wales | Building and Construction Industry Security of Payment Act 1999 |
| Victoria | Building and Construction Industry Security of Payment Act 2002 |
| Queensland | Building Industry Fairness (Security of Payment Act) 2017 |
| Australian Capital Territory | Building and Construction Industry (Security of Payment) Act 2009 |
| Western Australia | Construction Contracts Act 2004 (applies to contracts entered into before 1 August 2022) and Building and Construction Industry (Security of Payment) Act 2021 (applies to contracts entered into on or after 1 August 2022) |
| South Australia | Building and Construction Industry Security of Payment Act 2009 and the Worker’s Liens Act 1893 |
| Northern Territory | Construction Contracts (Security of Payments) Act 2004 |
| Tasmania | Building and Construction Industry Security of Payment Act 2009 |
Key Takeaways
As a contractor, you will need to consider whether a lump sum contract is the most appropriate type for your work. A few factors you should consider are:
- the timeline for your project – if the project needs to start right away before the scope of work is finalised, a lump sum contract may not be suitable; and
- the certainty of the work and any available plans and specifications – you will want as much information as possible to enable you to make accurate calculations of the costs, material and labour to quote a final price. You should ensure you have not missed any expenditures or time in calculating your final price.
For assistance drafting a lump sum contract for your project, our experienced construction and building lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A lump sum contract (or stipulated sum contract) specifies the contract’s price, as opposed to a contract where payment can depend on variations to the project. This figure is obtained after examining the project’s plans and specifications. Using lump sum contracts is common in the construction industry.
Using a lump sum contract can assist with reducing administrative costs and processes. It can also provide certainty for both parties as the project costs are agreed upon at the start of a project. Likewise, it can increase independence, as the contractor can get on with their work with minimal or no reporting requirements and supervision by the customer.
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