Lump Sum
A fixed total price for a defined scope of work, with the contractor absorbing the risk of cost overruns within that scope.
Definition
A lump-sum bid is a single fixed price for a defined scope of work. The contractor commits to delivering the full scope at the stated total, and absorbs the risk of any cost overruns within that scope. The owner gets price certainty in exchange for paying a risk premium.
Lump-sum contracts are the most common pricing model on private commercial buildings in North America. The drawings and specifications must be reasonably complete before bidding, because the contractor is pricing a defined deliverable rather than a quantity remeasurement.
How lump sum is used in estimating
In estimating, the path to a lump-sum bid is: complete a quantity takeoff, price every scope using unit prices and subcontractor quotes, add general conditions, contingency, and overhead and profit, then roll the total up into a single number. The lump-sum bid is what the contractor submits, but internally the estimating team still tracks every line so they can administer the project against the schedule of values after award.
During construction, payment on a lump-sum contract follows the schedule of values rather than remeasured quantities. The contractor and owner agree on what percentage of each line is complete each month, and progress payments are issued on that basis. Change orders are priced using the unit prices that were submitted alongside the bid where applicable, or on a time-and-materials basis when the work is outside the original scope.
When to use lump sum
Use lump-sum pricing when the design is largely complete, the scope is well-defined, and the owner wants price certainty. Avoid lump-sum on projects with major design unknowns, fast-track schedules where construction starts before drawings are finished, or extensive subsurface or renovation risk where conditions cannot be predicted. In those cases a unit-price or cost-plus model better aligns risk and reward.
Frequently asked questions
Q.What is the difference between lump sum and fixed price?
In practice the terms are used interchangeably for a single fixed total. Some contracts use fixed price more broadly to include guaranteed maximum price (GMP) arrangements, but a pure lump sum is always a single agreed total.
Q.How is a lump-sum bid calculated?
Through a complete bottom-up estimate: takeoff every quantity, price every line, add general conditions, overhead, profit, and contingency, then sum to a single number. Any line that the contractor did not catch becomes their loss after award.
Q.What is the risk in a lump-sum contract?
The contractor carries the risk of cost overruns inside the contract scope. If material prices spike, labor productivity is worse than estimated, or work was missed in the takeoff, the contractor eats the difference. This is why lump-sum bids include contingency and risk premium.
Q.When are lump-sum contracts not appropriate?
When drawings are incomplete, when scope is expected to evolve significantly, or when subsurface or existing-condition risk is high. In those cases, unit price or cost plus shifts risk more fairly between owner and contractor.
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