Lump Sum

A contracting strategy that involves the client agreeing a fixed price with a contractor for completion of a defined scope of work. Payment may be made as a lump sum, or a series of progress payments against defined milestones, which is often the case in construction contracts. Clients prefer lump sum pricing as the financial cost of the project is defined in advance, providing the scope of work does not change. If the client changes the scope, this may give rise to variations, but otherwise the risk of costs exceeding the tendered price lie with the contractor, not the client. For this reason, lump sum contracts are most appropriate when the scope of work can be defined with some certainty. If a contractor is asked to provide a lump sum price for a project with high uncertainty or many unknowns, it is likely that the bidders will include contingencies in their offers to cover the risk. See also Contracts and Schedule of Rates.