Now that we’ve dispelled some common construction contract myths, its time to look at the first of three common types of contracts you can use for your remodel.
Before doing so, remember each of the three contract types we will analyze have both benefits and drawbacks. I’ll help you decide which contract is right for you.
The Spirit of the Contract
The lump sum contract, also known as the stipulated sum contract, is the drill sargent of the construction contract world. It’s the “everything by the rules, no flexibility, feast or famine, hard-nose” contract. It is simple in it’s arrangement and terms: basically Contractor is obligated to do exactly what they said they will do for exactly the price they say it will cost in exactly the time they say it will take. The spirit of the contract can often be contentious, because it does not allow for much deviation or flexibility from either the project Owner or the Contractor.
So what’s wrong with this? Well, nothing is really wrong with it, however it requires the project Owner to have everything, I mean everything in the project accounted for before work starts. I mean every finish selected, every detail drawn out, every question answered. Everything.
Sometimes this is possible, and even preferred. Sometimes not.
How a Lump Sum Contract Addresses Money
When it comes to the money aspect of this contract, it’s pretty cut and dry.
Contractor will complete project, as per plans and specifications, for exactly the amount the contract says. If the project goes over budget, the Contractor looses money. If the project comes in under budget, the Contractor makes extra money.
Like all of the contracts, the lump sum contract has provisions for “change orders.” Change orders are a contractual increase in the project cost and/or duration due to a change in project scope. The change in the project scope could be caused by an Owner changing their mind, or discovery of an unknown preexisting condition, or an act of God. Change orders are the only legal method by which a Contractor can ask for more money or time for the job. Change orders have to be approved by the project owner to be in effect.
How a Lump Sum Contract Addresses Schedule
Much like the fiscal side of the contract, the schedule in a lump sum contract is almost always set in stone. The contract declares a certain number of days for the job. If the job takes longer than the contract says, the Contractor is in violation of the contract, and thus susceptible to all types of nasty things.
One of these nasty things is called “liquidated damages.” Liquidated damages are a monetary penalty to the Contractor for going past the project due date. For example, if you have a $100 per day liquidated damages clause in your contract, the Contractor has to reduce his contract amount by $100 for each calendar day he is late in delivering the project. It’s like a reverse speeding ticket: you get penalized for going too slow.
Now are you starting to see how a lump sum contract can be a battle?
When to Use a Lump Sum Contract
A Lump sum contract is most applicable if:
- You have a great, detailed, thorough set of plans for your project
- You are very clear with your project specifications, and have all of your finishes chosen.
- You “hard bid” your project, meaning solicit 3-4 bids with the low bidder guaranteed the job. A lump sum contract is usually best following a hard bid because you want a bullet-proof contract in case they tried to get the job by cutting corners.
- You don’t really trust your Contractor.
- You tend to be a hard nosed, by-the-book type of person.
When Not to Use a Lump Sum Contract
One of the other contract types might be best if:
- You expect your Contractor to help you design your project as you build it.
- You do not want to complete a thorough set of plans for the project.
- The spirit of the lump sum contract is in conflict with your relationship with your Contractor.
In our next part of the construction contracts series, we’ll take a look at a contractual opposite to the lump sum contract: the T&M contract.
PS: If you’re reading this post, you probably have a remodel of some kind in mind. (Sorry for the rhyme.) If you do, I recommend downloading my free e-book Remodel with Confidence. It’ll guide you through the remodel process step by step.
