A lump sum contract is an agreement in which one party consents to pay another party a set dollar amount for completing the work or providing the goods described in the agreement. Typically, such contracts do not require contractors to provide a detailed breakdown of costs, but rather, the payment of the total contract price is linked to the contractor completing all of the work specified in the contract. For example, a software installation company may enter into a lump sum contract for installing multiple data processing systems in a building. Instead of receiving an individual fee for each system installed, the company will receive one fixed amount after it finishes installing all of the systems.
This type of contract is regularly used for a variety of transactions, including construction work, consulting projects, and architectural assignments. It is easy to manage, since payment is made only once. Generally, the lump sum contractor is paid a flat dollar amount after the party receiving the services or goods is given the output. For instance, under a lump sum arrangement, an architect firm is usually paid its total fee once it has delivered acceptable blueprints to the building owner.
A lump sum contract is usually a written agreement, although an oral agreement may be binding in some cases. Once the contract has been signed, all parties are bound to adhere to its terms. The contract ordinarily details the fixed total amount to be paid to the contractor and the timeline for payment. If the contract is for services, a comprehensive description of the scope of the services to be performed by the contractor should be documented. Contracts for goods should thoroughly detail the goods to be provided, including the components, features, and characteristics that must be a part of the final deliverable.
The construction industry often engages in lump sum contracting. In most cases, the building owner signs an agreement with a general contractor, who then enters into separate agreements with subcontractors, such as plumbers, electricians, or framers. The general contractor is responsible for paying the subcontractors.
As a rule, construction contractors are not entitled to receive more money than the contract specifies, but in some cases, a lump sum construction contract may allow for fee adjustments. For example, if the cost of labor or construction materials rises or falls substantially, the total amount to be paid to the general contractor may be adjusted accordingly. By and large, this type of clause must be written into the agreement in order to be permitted.