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Home > Types of Contracts > Lump Sum Contracts

Lump Sum Contracts

As briefly summarised earlier, lump sum Contracts are employed in situations where the scope, design and specifications for a requirement are known with the highest degree of certainty in comparative terms and, hence quite naturally, gives enough confidence for a Contractor to quote a fixed price . Such Contract types are based on the principle of fixed payments or sums calculated by the Contractor after examining the Invitation to Tender (ITT) or request for Quotation (RFQ) documents which define the nature and extent of the Works/Services required with as much certainty and accuracy as possible.

The Contractor agrees to perform the Contract for the agreed sums which generally are not subject to revision or variation. In actual practice however, during execution, there could be variations due to various reasons such as worksite practicalities or factors other than those inherent to the Contract conditions. Thus, to cover for any unknowns during execution, the lump sums at the Tendering stage, should be elaborated with a breakdown of quantities alongwith schedules of unit rates separately for various items such as manpower, materials, equipment and work units, to assess and compute the cost of variations / changes, if any. Breakdown of quantities and rates in a lump sum Contract should not be confused with the BOQ / Schedule of Rates types of Contracts since they have a different intention and purpose.

Some of the salient points of Turnkey and Fixed Lump Sum Contracts are detailed below:

Turnkey Contract

  • A detailed Client’s performance specification is required prior to seeking Tenders i.e. a clear end product definition.
  • Contractor bears full responsibility for developing the design, detailed specifications, construction and commissioning of the plant/facility meeting Contract requirements and specifications.
  • Client has restricted degree of control and supervision over the Contractor at any stage of the Contract execution.
  • Competitive Tenders may be difficult to obtain in respect of patented or specialist processes.
  • Contractors could tend to use the quickest and cheapest means and solutions to achieve end results without perhaps regard to long term plant/facility maintenance or operability considerations.
  • Solution of technical problems could be the sole responsibility of the Contractor.
  • Technical evaluation of Tenders is often complicated, difficult and time consuming.
  • For large value Contracts, there may be advantages in the Contractor providing financing arrangements.

Fixed Lump Sum Contract

  • Client would have to carry out, either through in-house capability or outsourced to an engineering contractor, a pre-FEED (Front End Engineering and Design) or basic design & engineering / FEED, to arrive at the definition of requirements so as to enable the works
  • Contractor to work to a clearly defined scope. The basic engineering and design normally could include the following:
    basis of design and engineering of the proposed facility containing designs, drawings, specifications and related documentation;
  • Process selection, if required;
    preliminary as constructed Works cost estimate (with ± variation);
    preliminary construction duration/schedule;
    construction and other related procedures;
  • Client bears full responsibility for the design, engineering, specifications and supervision of the construction Works.
  • Client could be responsible for breaches of third-party patents incorporated in the supplied design.
  • longer periods (appx. 12 – 18 months) are often required to prepare Invitation to Tenders and conclude the Contract.

The main advantages and disadvantages of lump sum Contracts are:

Advantages of lump sum Contracts:

  • Financial commitment is known before a facility is constructed;
  • Risks are factored in by the Contractor;
  • Contractor has maximum incentive for expeditiously carrying out the Works since its profitability will be determined largely by schedule and end product performance;
  • Contractor would assign its best personnel and other resources;
  • Reduced level of Client supervision required (and hence site establishment costs).

Disadvantages of lump sum Contracts:

  • Client would need to fully develop the design or performance specification prior to seeking Tenders and this may result in a long lead time from inception or approval of budgets through the Tendering stages prior to commencing Work on site;
  • In case of modifications/changes that are inevitable in large project Works, there could be variations/amendments/change orders that are difficult and costly in their assessment;
  • If there is not enough strict control (thru measurable parameters), Contractor could look at completing Works with a short term objective often possibly ignoring long term considerations such maintainability and operability;
  • Cost of Tendering could be high if the Tenderers list is not limited. This works as a double edged sword often precluding otherwise qualified Contractors from Tendering;
  • Tenders could contain prices for unforeseen risks.

Over the years under the fixed lump sum type some popular contracting forms have emerged and these are “EPC” - Engineering, Procurement and Construction and “FEED” - Front End Engineering and Design Contract forms that are fairly well understood in the industry with respect to its risks and underlying obligations.

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