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What Is a Lump Sum Contract?

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When it comes to paying money for work to be done, there are a number of options. One way of doing things is to pay for the costs associated with the job along with a fix fee for labor. This means that there can be uncertainty about the final cost until the work is complete. Another option is the lump sum contract. What happens here is that the individual who wants a project complete agrees to pay a specific lump sum of money upon completion of the work. Here the final cost is already decided and it is up to the contractor to get the job done within their budget.

How a Lump Sum Contract Works

With a lump sum contract there is no requirement for the contractor to provide a breakdown of the costs associated with the work. Instead the entity providing the work agrees to take the burden of all the costs in exchange for the agreed upon payment at the end of the contract. If the cost of doing the work ends up being more than the agreed payment then this will mean that the contractor will be out of pocket. On the other hand, if they manage to finish the work under budget they get to keep this money.

The Benefits of the Lump Sum Contract

This type of contract can be a good choice in a lot of situations. It means that the person who wants the project complete only needs to make one payment at the end of the work. It also removes the uncertainty about how much the final cost is going to be. There is no need for those ordering the project to worry about costs getting out of control. This type of contract can also work out well for the person doing the work. So long as they are sure about how much the job is going to cost they will be able to agree upon a final payment that will be rewarding. The fact that there is no need to justify expenses means that they will have a lot more freedom in how they get the job complete.

In most instances the lump sum contract will be a written agreement where both parties will be legally obliged to keep up their side of the bargain. It is possible to have an oral agreement but these are not as legally secure. Any contract needs to be clear about the expectations of both parties, because any vagueness could later lead to disputes.  It is standard practice for the contract to also have some type of timeline for when the work should be complete. This type of arrangement is very common in certain industries such as architectural work, construction, and all types of consulting. In a lot of cases a contractor will sign a lump sum contract, and then hand over the actual work to a third party. In this case the contractor will have their own contracts with the individual service providers.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.


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