The Lump Sum contracting is one of the construction contracts in business. One often refers to these contracts as a stipulated sum. In this kind of contract of a business, one quotes a single price for the entire project. The quote is on the basis of the specification and plans and therefore covers the entire project. In this Lump Sum Payment For Construction article, you can see how to use them for your construction.
In this process, the owner has an idea of how much the work will cost in advance. This kind of contract needs a complete and full set of plans and specifications.
It also includes all the indirect costs along with the profit. Thus, leaving the retention, the contractor will receive progress payments every month.
The lump sum contract has minimum flexibility along with the deviations in the designs from the original plans.
It would need a change order that the owner would pay. In this kind of contract, the payment is made based on the percentage of completed work.
Therefore, from the guaranteed maximum price, this kind of contract is different, as the contractor is responsible for the extra cost beyond the agreeable price.
However, the contractor can gain from the savings if the final price is lesser than the agreeable price.
concept of the contracts
A professional of the construction industry often terms lump sum contract to be a sum of the stipulation.
One uses the concept of these contracts, usually in the construction industry, for contracting administration costs and reducing design.
The professional of the construction industry calls it to be lump sum due to a specific reason.
This is because the contractor needs to submit a global and total price rather than bidding on individual terms.
It is a highly-recognizable agreement form of contract in the construction industry in simple and small projects.
These contracts are also well-recognizable with an explainable scope or construction projects. In these projects, there is a minimum risk of different site conditions.
What Is A Lump Sum Payment?
Do you understand by lump sum meaning? The lump sum payment is usually a large sum of money.
One pays the large sum in a single payment instead of breaking the amount into installments. However, in the case of dealing with a loan, it is also known as bullet repayment.
In business, one often pays the lump sum tax or amount in the event of debentures. Additionally, one can also describe this payment as a bulk payment for acquiring a group of items.
This can be at times when a company pays one sum for the inventory of another business.
How To Compare The Lump Sum Amount With Annuity Installment?
This follows a discussion of lump sum vs. annuity. One pays stipulated payment for a particular cause at once instead of going through multiple payments periodically.
Whereas, one can consider annuity to be a steady payment that is made at equal intervals, either monthly or annually.
This kind of payment allows an individual to collect all the money at a single time. Annuity installment payment enables an individual to pay out structurally equal amounts at regular intervals over a period of time.
The Basics Of A Stipulation Payment In Construction
Do you know what is lump sum? It is a bulk amount that one pays all at once. However, one opposes the amount that one divides up and settles in installments.
For every beneficiary, it is not the best choice of payment. For some people, annuitizing the fund for periodic payments makes more sense.
The right choice for the amount depends on the value of the bulk amount versus the payments and financial goals.
Rather than a lump sum amount, annuities provide a degree of financial security. Whereas, the retirees in poor health might derive more significant benefit from these payments.
Expert Advice For Using The Stipulation Contract In A Project
One uses a lump sum contract usually in a construction project for contracting the administration costs and reducing designs.
Additionally, in a stipulation contract, a contractor needs to submit a global price rather than bidding on individual items. In this contract, the owner essentially assigns all the risk to the contractors.
Stipulation And Type Of Contract Used
The stipulation contract is one of the types of construction contracts which one often refers to be a fixed price contract. Apart from it, there are three other types of construction contracts.
These are the Cost Plus contract, Time and Materials contract, and Unit Pricing contract. In the case of a stipulation, it is the total fixed price for all construction-related activities.
It includes liquidation damages for late termination and even incentive benefits for early termination.
The Cost Plus contract involves the payment of the actual costs, purchases, and other expenses of construction activities.
The Time and Materials contract includes additional costs for construction activities. In Unit Pricing contracts, the unit prices are set during the bidding process on requesting specific quantities and pricing.
Advantages And Disadvantages With Contract And Lump Sum Payment
In construction projects, the bulk amount contract is the simplest form of contract among the other agreements.
Before initiating the contract, it fixes the price that one should pay for undertaking the work.
The advantages of this kind of payment are it is suitable for easily defined and relatively simple constructions.
It involves a little below-ground work. A bulk payment covers all the costs, including profit, overheads, and risk contingencies.
The disadvantage is that an employer might need to pay a high price for any kind of addition or alteration.
The addition or modification happens according to the demand of the project. This is because the contractor is only committed to undertaking a fixed amount of work for a fixed payment.
Estimation Of The Stipulation Payment In A Construction Project
In a construction project, for calculating the stipulation oriented payment along with the interest rate, there is a specific formula.
One employs this formula for calculating the future value, which is a lump sum with the compound interest.
It is as- A= P(1+r/n)^nt where A is the future value, P is the principal amount or present value.
Whereas r is the rate of interest, and t is the number of years, one deposits money. Hence, n is the number of periods on which interest rate compounds every year.
What Are The Lump Sum Critical Items?
In the lump sum amount, one includes several critical items. These include the unbalancing bids, scope, and design changes, change orders, and early completion.
This kind of contract eventually produces large claims and disputes that would arise from the contract documents.
Contractors often produce an unbalancing bid by raising the unit prices on items that need to get complete earlier.
One can dispute the price order if the owner receives a change order proposal from the contractor.
On the basis of the experiences, the contractor might also suggest changes in design. Even for the contractor, the stipulation contracts might include early completion compensation.
From the above article, we can conclude that lump sum contracting and payment is an essential component of the construction industry.
These contracts usually deal with a considerable sum of payment at a single time avoiding payment break-ups.
There are several critical items with the involvement of stipulation payment in project duration.
Do you think lump sum payment to be the most essential mode of payment?