The term firm fixed price or lump sum contract refers specifically to a type or variety of fixed price contract where the buyer or purchaser pays the seller or provider a fixed total amount for a very well-defined product, however there is the allowance within these for a variance in the event there are incentives attained through project incentives achieved or targets met. There are benefits of this type of contract to both the buyer and the seller, and these are similar to those for the fixed price incentive fee contract. To the seller, it is beneficial because it typically allows for the seller or provider to charge a reasonable base fee, yet also allows for exceptional performance to be rewarded further. However, for the buyer that also provides a very tangible benefit. The buyer typically will be paying a very reasonable base fee up front, but there is of course the chance that the price will go up in the future if certain conditions are met.
This term is defined in the 3rd edition of the PMBOK but not in the 4th.
Between lump sum and cost plus, which is the least risky?
Depends on whether you are the seller or the buyer and also on the payment terms. Ideally, you would agree on payments for milestones after a major deliverable has been accepted so that the seller has cash coming in and the buyer is assured that the deliverables are met. Lump sum may have the disadvantage for the seller that cost for external resources rise whereas the lump sum stays the same.
I have an idea for a contract, I was wandering if there is a defined term for this type of contract: A lump sum contract, however in the case the sellers cost to deliver are less than expected, the seller refunds some of the returns to the purchaser. One explanation for the purpose of this would be that the seller doesn’t want to rip off the customer but still wants to protect against risk.
The other way to decribe this would be as a reimbursable contract with a capped maximum value. The labor rate would probably be at a higher than normal rate as the seller is taking on some risk.
Wouldn’t this be a Fixed Fee plus Incentive contract?
Incentives are usually based on performance (as an aside, they can be used in both Fixed Price and Cost Plus contracts).
I think Aaron’s idea would fall under Fixed Price with Economic Price Adjustment since the amount of the ‘refund’ would be based on lower costs for materials or smaller labor effort required to deliver. Note that during negotiations, the seller will want the ability to adjust the cost upwards if materials are more expensive or if the job takes more effort than expected. Generally, it’s good form to have a maximum allowable adjustment.
In a lump sum contract with a set of bill of quantities specifying the key outputs for the contract, how do you determine the payment value if some items have not been addressed fully as specified?
eg, fix 200 leakages on the distribution pipeline at a cost of 2,000,000/=. Now if only 100 leakages are fixed, how much do you pay in a lump sum contract?
I guess then this is the wrong type of contract if you are not sure about the scope.
I am currently going through a tricky situation and would really appreciate your input:
A client enters into a Design and Build Contract under FIDIC Yellow Book with a contractor through a tender process. At tender stage, the client provides the contractor with architectural concept design on which the contractor makes allowances for structure and MEP using the basic specifications provided by the client. Both parties sign a fixed priced lump sum contract which also stipulates that if the contractor performs any value engineering, the client is entitled to 70% of the cost saving while the contractor receives the balance of the saving. During the construction design stage, the contractor optimizes design and due to favorable site conditions, the number of piles previously allowed at tender stage by the contractor is reduced by 50%. The client strongly believes that he is entitled to a share of the cost saving due to design optimization. However, the contractor argues that the original design intent has not changed and the client’s requirements are fully met so the client is not entitled to any saving as it is not considered value engineering.
I believe the contractor is right because if he over-measured piles in the BoQ at tender, it does not mean the client is entitled to the saving… as the contractor took a risk in doing so. Likewise, the contractor under-measured rebar at tender but the client will pay for extra rebar, since the price is fixed and based on lump sum.
Can you please advise on your thoughts? Apologies for the long message, I tried to be as clear as possible.
Sorry for the late response. I think this can only be answered by a legal person, apologies.
Thanks a lot … I want to share more info about Lump Sum Contract