iam a small engineer and i do a search in construction contracts
1 reply
May 19, 2020
The question is "compared to what"? The advantage of a lump sum contract is that you are guaranteed a certain sum of money. The more efficiently you perform, the more money winds up in your pocket. If you don't perform efficiently, or if your estimate of the cost/time/materials to complete the project are off, then you are taking the risk of not profiting from your work.
One alternative to a lump sum contract is a cost plus contract. A cost plus contract guarantees you a profit based on a percentage of the cost it takes you to complete. The benefit is that it insulates builders from the risk that they will incur costs in excess of their estimates by providing that they will be paid their building costs plus a stated profit. The drawback/tradeoff there is that there is no guarantee that the costs are going to be so great that you earn a great deal of profit. The customer/general contractor/owner may decide to they don't want to spend that much, or the price of labor or materials may unexpectedly drop (this is probably happening right now), thereby leaving you with must lest expense, and therefore much less profit. And you are not going to be certain of your profit until near the end of the project, because you aren't going to be certain of your costs.