BACK-TO-BACK AND LUMP SUM CONSTRUCTION CONTRACTS

Mohammad T. Alsayyed, PhD, PE, Geotechnical Engineer

International Center for Geotechnical & Engineering Studies, Bethlehem, Palestine

ABSTRACT

In big construction projects, the project is implemented by hiring a main contractor to carry out the project in full
and to be responsible towards the owner for the execution of the overall project. Back-to-back contracts are thought
of as risk-free but they are not. Historically, it has been difficult for organizations to manage this type of contracting,
especially when it involves multi-layer agreements. The main contractor transfers the execution of all the different
components to one or more subcontractors and/or suppliers. The main contractor in this case tries to be with the
minimum or no responsibility or obligations.

This paper addresses the areas that may be of particular concern in back-to-back contracts such as: extension of time
and additional payments, changes or variation procedures, claim procedures, completion requirements and
deadlines, limitations or liability, suspension and termination, dispute resolution and cooperation and coordination
between the parties.

The paper will address as well the Lump Sum type of construction contracts. This is another type of contracts that is
commonly used. The difference between lump sum and measurement contracts, advantages and disadvantages, firm
price contract, fixed price contract, variations in contract items and dispute will be presented.

Introduction

It’s common in the construction industry for a main contractor to engage the services of a subcontractor to complete
all or part of a particular project for a client. The client usually requires that the main contractor is liable for the full
extent of the work for the project. To protect their liability, the main contractor will often seek to have the
subcontractor legally responsible for as much of the project as possible. Essentially, this is a back-to-back contract,
and it is becoming increasingly standard where a project requires the collaboration of several different entities to
complete the full scope of work. There have been a number of developments in FIDIC since 2010. These include the
introduction of a new subcontract for use with the Red Book – the FIDIC Construction Contract, 1st Edition 1999 -
and also some changes to the Pink Book, the version of the Red Book used by the Multilateral Development Banks.
In the following paragraphs, different issues are discussed in order to reduce the disputes in the back to back
contracts.

How Does Back-To-Back Contract Work?

Clients of construction work understand that there may be multiple entities needed to complete their project.
However, clients usually engage with only one entity: the party responsible for the delivery of the project, referred
to as the main contractor. The client is protected this way because there is a single entity who is fully liable for the
whole project. It is much easier to deal with a single party with issues of liability and disputes.
However, a main contractor usually cannot complete the work singlehandedly – they may engage several
subcontractors to assist. In this case, they want to make sure that they are not directly liable to the client for work a
subcontractor completed. As such, they will ensure that their contract with the subcontractor mirrors their contract
with the client. The key terms affected are usually the main contractor’s obligations including:

 liabilities;
 the rights of the subcontractor; and
 dispute resolution clauses.

Obligations of the main contractor passed down to the subcontractor may include:

 responsibility of maintaining the design for the project;

 specified date for completion of that part of the project; and

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 quality and standard of work.

For a subcontractor, there are also rights that should be passed down from the main contractor, including:

 entitlements for extension of time to complete the work;

 where some variation of the work is needed; and
 right for additional compensation against the main contractor if the main contractor breaches a term of the
subcontract.

Key Issues
It can be difficult to ensure that the main contract and the subcontract set out all of the obligations and entitlements
required to fully protect the relevant parties. Issues arise where the subcontract does not effectively complement the
main contract. Simply citing the same contractual terms between the client and the main contractor may not make
sense for some provisions or leaving out other important issues that apply solely to the relationship between the
main contractor and the subcontractor.
Matters that arise in a subcontract, but not the main contract, could include the:

 main contractor’s obligation to pay the subcontractor even if the client has not paid the main contractor; or
 subcontractor’s liability to the main contractor for their delay of work, which also delays the obligations outlined in
the main contract.

Ensure that the subcontract includes all the relevant clauses the main contract requires but also those that apply
solely to the relationship between the main contractor and subcontractor.
In case of dispute, if the dispute resolution process involves mediation or arbitration, the decision will need to bind
all parties. This must be in a particular way that is clearly present and consistent across both contracts.

Key Takeaways
To make back-to-back contracts work effectively, both main contractors and subcontractors need to be acutely
aware of:

 their obligations; and

 the extent of their liability.

Draft the contract to include all relevant considerations; don’t just refer to the terms of the main contract.
Main contractors should seek the client’s approval to engage subcontractors before seeking to draft back-to-back
contracts. Within the contract itself, main contractors should pass down liability to the subcontractors for their
portion of the work.
Subcontractors must understand the obligations passed down to them. Subcontractors should also limit their liability
to their part of the project.

Dispute resolution
In a back-to-back scheme, a dispute between the main contractor and the employer is likely to have significant
implications on the relationship between the main contractor and the subcontractor.
Depending on the nature of the subcontract, claims that are commonly passed up and down the chain include those
relating to defects, performance failures and delays, and variations. In all cases, the main contractor wants to ensure
that it is not shouldered with a liability in respect to matters outside his control that it cannot pass on to his
respective counterparts. The main contractor's greatest concern will be to ensure that it is not exposed to differing
decisions by the courts or tribunals appointed under the two contracts.
The following are some of the main issues that will need to be considered:

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  To what extent should the findings of a dispute adjudication board or arbitral tribunal in a dispute between
the employer and the main contractor be binding between the main contractor and the subcontractor? This
is something that is likely to be strongly resisted by subcontractors and employers respectively.

 Clauses providing that a party is to be bound by the outcome of proceedings under a contract to which it is
not party could be acceptable if that party is given a contractual right to participate in the main contract
proceedings. In this regard, consider whether the third party should be given the right to participate directly
(preferable for the main contractor and subcontractor) or indirectly (preferable for the employer) in those
proceedings.

 Under what circumstances will the main contractor be obliged to pursue the subcontractor's claim against
the employer and what is the sanction for a failure to pursue such a claim? This is a common concern of
subcontractors as the main contractor may often be less interested in pursuing claims in which it has little
or no interest, particularly if it has a commercial interest in maintaining good relations with the employer in
order to secure future projects

Risk Pass Down: The Subcontract works on the basis that the risks assumed by the Contractor under the Main
Contract are passed down to the Subcontractor and the Subcontractor is deemed to have "full knowledge of the
relevant provisions of the Main Contract".
The Subcontract is therefore drafted on a "back to back" basis with the Main Contract, with the Subcontractor
obliged to perform "all the obligations and liabilities of the Contractor under the Main Contract" insofar as relevant
to the Subcontract works - albeit with some modifications. For example, in relation to the time limits for giving
notice in Clause 20.1, the Subcontractor has a shorter time limit than the corresponding time limit in the Main
Contract. This is in order to ensure that the Contractor has sufficient time to receive and process the information
from the Subcontractor and still meet the deadline for giving notice to the Employer.
There are also stated exceptions to the risk pass down approach. These are listed at Clause 2.2 of the Subcontract
and include the Contractor's obligations in relation to setting out and obtaining permits, licences and approvals.
Clause 2.2 of the Subcontract also allows the parties to add other additional specific exclusions in Annex A.
Payment: The Subcontractor must submit his draft final statement 28 days after the end of the Subcontractor
Defects Notification Period (which is tied into the Defects Notification Period under the Main Contract). The
Contractor may require additional information if he is unable to verify any part of the final statement. The
Contractor must pay the balance of the Subcontract Price within 56 days after the end of the Subcontractor Defects
Notification Period.
The Contractor can defer payments to the Subcontractor if the amount has not been certified by the Engineer or the
amount has been certified by the Engineer but not paid by the Employer. He may not do so if the non-certification or
non-payment is due to Contractor default or Employer insolvency.
Co-operation with other subcontractors: The Contractor is responsible for the overall co-ordination and project
management of the Works and for the co-ordination of the Subcontract Works with the Main Contract Works and
the works of any other subcontractors.
However, these obligations of the Contractor are subject to Clause 6.1 which requires the Subcontractor to co-
operate with any other subcontractors. Clause 6.1 also provides that if the Subcontractor is delayed or impeded by

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another subcontractor he must give notice of this to the main Contractor. In these circumstances the Subcontractor
may be entitled to an extension of time and payment of any costs incurred.
Performance Certificate: The Performance Certificate applicable to the Subcontract Works is deemed to be the
Certificate that is issued by the Engineer under the Main Contract. In other words, the Subcontractor's performance
is not certified until performance of all the Works have been carried out and certified under the Main Contract. The
Guidance Notes contain an alternative clause that can be used if the Subcontract Works are completed in the early
stages of the overall project.
Notices: As is the case with Contractor claims under Clause 20.1 of the Main Contract, compliance with the
obligations relating to notices in Clause 20.1 of the Subcontract is a condition precedent to any Subcontractor claim.
Failure to comply with the notice provisions will disbar any claim.
Loss or damage to Subcontract Works: The Subcontractor is by default obliged to rectify all loss or damage to the
Subcontract Works during the period when he is responsible for their care. Clause 17 sets out the circumstances for
which the Subcontractor is responsible for the cost of that rectification and contains a mechanism whereby the
Subcontractor can recover its costs for rectification of loss or damage caused by something for which he is not
responsible.

Termination: Clause 15.1 entitles the Contractor to terminate the Subcontract if the Main Contract is terminated.
Other rights of the Contractor to terminate the Subcontract are set out in Clause 15.6 and arise if any one or more of
the events or circumstances set out in Clause 15.2(a)-(f) of the Main Contract are applicable to the Subcontractor's
performance under the Subcontract.
Points to be aware of when using the Subcontract
Numbering: The "back to back" drafting approach assumes that the numbering of the Main Contract and the
Subcontract are identical. Care is needed to check that the numbering of the two contracts corresponds exactly,
particularly if substantial amendments have been made to the Main Contract.
Deemed knowledge of Main Contract: The Subcontractor is deemed to have full knowledge of all the relevant
provisions of the Main Contract – whether or not this is in fact the case.
Overriding the general risk pass down approach: If the Contractor and Subcontractor have agreed any specific
exceptions to the general risk pass down approach in addition to the ones set out in Clause 2.2, these should be
expressly identified in Annex A.

Back to Back Contract: Everything You Need to Know

A back to back contract can refer to many different things, but it's most commonly used in construction, in which
case it means the main project contractor requires their subcontractors to adhere to the original contract terms. In this
usage, the terms of a back-to-back contract may also be known as terms which are “incorporated by reference” (as
opposed to newly drafted terms).
In general usage, “back-to-back” means that any document contains all the same terms and characteristics as the
following contract. You might open a back-to-back letter of credit, which contains all the same elements as the
previous one. In housing development, the term might refer to houses built adjacent to one another.

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Why Use a Back-to-Back Contract?

Back-to-back construction contracts are quite common, especially in large projects. Substantial
international projects typically require many participants' collaboration. Each of these
participants has a different capability when it comes to contributing to different aspects of the
project.
The principal contractor does not want to be solely responsible for all elements of the project.
Thus, they will attempt to pass their obligations and liabilities to the project owner through their
subcontractors. In doing so, the main contractor can limit their exposure to potentially risky
obligations. They do this by using back-to-back contracts with their subcontractors.

Drafting and Reviewing Back-to-Back Contracts

To incorporate the primary contract terms into back-to-back (subcontractor) contracts, copy the applicable terms
into the new contracts. Be sure to exclude any terms that do not apply, such as the total contract cost or other clauses
only relevant to the principal contractor. This method of drafting back-to-back contracts may seem simple and
efficient, but it can sometimes be more difficult than writing a stand-alone contract.
Stand-alone contracts include all the terms of the original contract which are relevant to the subcontract. Such a
contract may eliminate time-consuming cross-references, inaccuracies, and inconsistencies. However, drafting a
stand-alone contract may actually prove to be even more time-consuming than drafting a back-to-back contract, as
each party must examine the agreements and decide which terms will be included in the subcontract, and which
terms will need to be modified.
You may also use a standard form subcontract, a contract form that contains relevant clauses from the original
contract. For example, you may wish to use the FIDIC Subcontract for Construction for Building and Engineering
Works Designed by the Employer, which is an internationally used standard form subcontract meant to be used with
the FIDIC Pink Book and the FIDIC Red Book, 1999 edition. However, the usefulness of this type of contract
varies, since parties usually edit standard form contracts to meet their own preferences, which may generate
inconsistencies among the original contract and the subcontract.

As you draft or review back-to-back contracts, make sure to thoroughly examine each contract clause. Elements
that might be particularly important include:
Term extensions and additional payments
Changes in procedure
Completion deadlines and requirements
Liability limitations
Indemnification
Damages
Suspension and termination
Coordination and cooperation of each party
Dispute resolution
Notice requirements
Important deadlines

Depending on whether the party is the principal contractor or the subcontractor, the manner of handling these
concerns may vary.

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It is absolutely imperative that each party carefully and thoroughly reviews the principal contract's terms to ensure
that every desired clause is included within the subcontract and that terms are consistent throughout all. Although
the process may be tedious and very time-consuming, it is recommended that each party takes a sequential approach
to examining the contractual terms and determining whether incorporating the term into the new contract will be
effective and consistent (in a legal and commercial manner) and will certainly have the intended effect. This
comprehensive walkthrough approach is best, regardless of whether the subcontract incorporated the principal
contract by reference or written as a stand-alone contract.
Back-to-back contracts
Back-to-back agreements, by which a main contractor seeks to pass its obligations and liabilities towards the
employer through to its subcontractor(s), are becoming an increasingly common feature of construction projects.
While they can be a convenient means of transferring risks and obligations down the chain of responsibility,
inadequate drafting can give rise to disputes which are particularly complex and difficult to resolve.
The back-to-back scheme
Large international construction projects often require the collaboration of several participants with different
capabilities. However, the owner (employer) of the project, often will require the project to be structured such that it
has only a single contractual relationship (the main contract) with one of the participants (the main contractor) and
not with all of them individually. From the employer's perspective, there is much attraction in structuring the project
such that the main contractor acts as the single point of responsibility.
The main contractor, having assumed responsibility for all aspects of the project vis-à-vis the employer, will aim in
turn to pass on its obligations and liabilities to its subcontractors so that it is left with only minimal, or no,
obligations or liabilities to meet on its own.
There are therefore obvious benefits for contractors in implementing back-to-back arrangements. However, in
practice drafting back-to-back agreements can be a difficult task.

Drafting back-to-back contracts

There are, in broad terms, two ways of structuring back-to-back subcontracts:
by incorporating by reference all the terms of the main contract save for certain parts of the main contract which are
expressly excluded or varied (often these are limited to clauses which are obviously not applicable to the
subcontract, for example clauses relating to price); and
by drafting a stand-alone set of terms and conditions specific to the particular subcontract.
The first approach is often seen by contractors as being the easiest and therefore most cost-efficient means of
passing down liabilities. However, without careful attention such an approach can often result in difficulties.
Particular care needs to be taken when drafting the back-to-back provisions. For example, a general provision stating
that all references in the main contract to the "Employer" and "Main Contractor" are to be read in the subcontract as
being references to the "Main Contractor" and "Subcontractor" respectively, may not be appropriate for every
obligation and could result in rendering what should be an essential term of the contract either ineffective or subject
to an interpretation that was never intended. Further, where there are long and detailed main contract specifications
(often in the form of employer's requirements) it can be a very complex, and indeed contentious, task to separate out
the obligations that are relevant to each individual subcontract; the subcontractors' greatest concern being that they
will inadvertently be taking the risk for matters that are inappropriate given the size and scope of their particular
subcontract.
These issues should be capable of being overcome by proper drafting of a standalone subcontract. A further obvious
advantage of standalone contracts is that in executing the subcontract the parties only have to refer to the one
subcontract, rather than having to also cross-refer to the main contract which itself can cause confusion. However,
drafting standalone contracts should by no means be considered to be an easier task; again considerable care needs
to be taken.

Common drafting issues

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Irrespective of which drafting approach is taken, there are a number of issues that require particular attention:

Conditional payment clauses

A common feature found in back-to-back contracts is a provision that payment to the subcontractor will be
conditional upon the main contractor receiving payment under the main contract. However, such "pay-when-paid"
clauses are not enforceable in construction contracts under the laws of certain jurisdictions, including England and
Wales and Singapore. Sometimes a "pay-when-certified" clause will be seen as an appropriate compromise if not
also outlawed in the relevant jurisdictions, as it will shortly be in England and Wales. Even if such clauses are not
prohibited under the applicable law, they are often resisted by subcontractors who expect to be paid once they have
rendered due performance of their obligations under the subcontract irrespective of the position further up the chain.

General or liquidated damages?

Will the main contractor be seeking to pass on liquidated damages levied by the employer under the main contract to
the subcontractor as general damages? If so, it will be desirable from a main contractor's point of view to specify in
the subcontract that, without prejudice to its right to recover general damages, any claim by it for general damages
may include some or all of the liquidated damages levied by the employer under the main contract. This is because it
might otherwise be questionable whether the liquidated damages levied against the contractor by the employer
constitute direct or indirect/consequential loss as against the subcontractor and therefore irrecoverable under the
relevant exclusion clauses in the subcontract. It will, of course be necessary to apportion the full amount of
liquidated damages applicable so as to provide for recovery of only those in respect of which the contractor can
legitimately claim against the subcontractor.
The subcontractor may, of course, resist inclusion of this item aslikely to tempt the contractor to seek to levy the full
amount of liquidated damages against an individual subcontractor. Instead, the subcontractor may prefer to negotiate
a rate of liquidated damages that covers all of the subcontractor's liability for the relevant breach (e.g. delay) under
the subcontract. While liquidated damages carry certain advantages for the main contractor, particularly in terms of
certainty of recoverable damages and not having to prove actual loss, the main disadvantage lies in the risk that the
rate of subcontract liquidated damages will not ultimately cover the actual loss and/or damage sustained by the
subcontractor's breach.

Contractual deadlines
It is imperative that deadlines in the subcontracts are aligned to those in the main contract, for example in terms of
document approvals, delivery/completion dates and claims notification periods. Some form of early warning
procedure may be desirable.
Gaps in the claims procedures across the two contracts are of particular risk to main contractors. This is because in
many contracts the main contractor's right to claim in full against the employer will be contingent on complying
with the main contract notice requirements. Those notice requirements therefore need to be adequately reflected in
the subcontract. In particular, the main contractor will need to ensure that it is not prevented from claiming in full
against the employer by reason of not receiving the necessary claim details from the subcontractor in time, while
remaining liable to the subcontractor for the same claim.
To avoid such a predicament, main contractors will need to ensure that the subcontract contains notification periods
that are shorter than those provided for in the main contract, so as to ensure that the main contractor has sufficient
time to pass on a subcontractor's notice of claim to the employer. In addition, the subcontract should require the
subcontractor to provide exactly the same information about the claim as the main contractor is required to provide
under the main contract.
.

The FIDIC Subcontract

In response to industry demand, FIDIC is in the process of preparing a Subcontract for Construction for Building
and Engineering Works Designed by the Employer to be used for subcontracts intended to be back-to-back with the
FIDIC 1999 Red1 and Pink2 books. In November 2009 FIDIC released a test edition of the Subcontract for
comment. The test edition is largely well-drafted however certain of the pass-down provisions could do with some

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revision in the final version that is due to be published for use this year. The dispute resolution clauses in the test
edition attempt to address the three issues referred to above however, regrettably, they are somewhat lacking and
contain substantial risks for both the main contractor and the subcontractor. Again, it is hoped that these issues will
be resolved in the final version. For a more detailed commentary on the FIDIC test Subcontract please click here.

A rigorous drafting process across all subcontracts

There is no one-stop solution to the various possible pitfalls associated with back-to-back contracts. Whichever
approach to drafting back-to-back contracts is chosen, the decision should never be based with the intention of short-
cutting what should necessarily be a rigorous drafting process. Both main contractors and subcontractors will have a
vested interest in ensuring that the subcontract is properly drafted. In addition, where there are a number of
subcontracts the main contractor will need to ensure that its main contract obligations are properly allocated between
the various subcontractors and none unwittingly omitted.

A lump-sum contract is normally used in the construction industry to reduce

design and contract administration costs. It is called a lump-sum because the
contractor is required to submit a total and global price instead of bidding on
individual items. A lump-sum contract is the most recognized agreement form on
simple and small projects and projects with a well-defined scope or construction
projects where the risk of different site conditions is minimal.

What Is Agreed to in the Contract?

A lump-sum contract or a stipulated sum contract will require the supplier

agreeing to provide specified services for a stipulated or fixed price. In a lump-
sum contract, the owner has essentially assigned all the risk to the contractor,
who in turn can be expected to ask for a higher markup in order to take care of
unforeseen contingencies. A supplier being contracted under a lump-sum
agreement will be responsible for the proper job execution and will provide its
own means and methods to complete the work.

This type of contract usually is developed by estimating labor costs, material

costs, and adding a specific amount that will cover the contractor’s overhead and
profit margin.

The amount of overhead calculated under a lump-sum contract will vary from
builder to builder, but it will be based on their risk assessment study and labor
expertise. However, estimating a very large overhead cost can lead the
contractor to present higher construction costs to the project owner. The
expertise of the contractor will determine how their estimated profit will actually
be. A poorly executed and long-delayed job will raise construction costs and
eventually diminish the contractor's profit.

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When to Use This Type of Contract

A lump-sum contract is a great contract agreement to be used if the requested

work is well-defined and construction drawings are completed. The lump-sum
agreement will reduce owner risk, and the contractor has greater control over
profit expectations. It is also a preferred choice when stable soil conditions,
complete pre-construction studies, and assessments are completed and the
contractor has analyzed those documents. The stipulated sum contract might
contain, when agreed-upon parties, certain unit prices for items with indefinite
quantities and allowance to cover any unexpected condition.

The time to award this type of contract is also longer; however, it will
minimize change orders during construction.

Advantages

A lump-sum contract offers the following advantages:

 Low risk to the owner.

 'Fixed' construction cost.
 Minimize change orders.
 Owner supervision is reduced when compared to Time and Material
Contract.
 The contractor will try to complete the project faster.
 Accepted widely as a contracting method.
 Bidding analysis and selection process is relatively easy.
 The contractor will maximize its production and performance.

Disadvantages

Although lump-sum contracts are the standard and preferred option for all
contractors, it might also have some limitations:

 It presents the highest risk to the contractor.

 Changes are difficult to quantify.
 The Owner might reject change order requests.
 The project needs to be designed completely before the commencement of
activities.
 The construction progress could take longer than other contracting
alternatives.
 The contractor will select its own means and methods.
 Higher contract prices that could cover unforeseen conditions.

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Lump-Sum Critical Items

Lump-sum contracts are a great tool for smaller jobs and quite simple projects.
However, lump-sum contracts could eventually produce large dispute and claims
that will arise from contract documents. The most common arguing factors are:

Unbalanced Bids

Some projects might require producing an application for payment using unit
quantities and unit prices. Many contractors will produce an unbalanced bid by
rising unit prices on items to be completed early in the project, such as
mobilization, insurances, and general conditions, and lowering unit prices on
items needed in later stages.

Change Orders

If the owner produces or receives a change order proposal from the contractor,
the price quotation could be possibly disputed. The owner might appeal that the
requested change was already covered under contract provisions. It is important
to prepare specific contract clauses specifying how change orders are going to
be managed and to what extent the contractor could claim delay damages.

Scope and Design Changes

A contractor may suggest design changes based on their experience. Contract

provisions should be clear on how those changes will be addressed and how
those costs will be divided or who will be responsible for the economic impact of
the proposed changes.

Early Completion

Lump-sum contracts might include early completion compensation for the

contractor. Early completion might produce higher savings for the project owner;
however, those clauses might be explicit in the construction contract.

In lump sum construction contract contractor bids a single fixed price for all activities in
the project scope. This method is particularly used for large construction projects and is a
conventional but most popular types of construction contract.

The contractor bears the risks associated with this contract and is responsible for
estimating project costs from drawings including overhead and his profit to determine the
price of the project.

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 lump sum construction contract is considered as the most effective means of reducing
construction price and is useful when projects and its activities are well defined.

Advantages of Lump Sum Construction

Contract
Lump sum construction contract is the most widely accepted contract between the owner
and the contractor due to it general predictability, easy management and assured
maximum price arrangements.
Advantages of Lump Sum Construction Contract for
Owner are as follows:
1. There is certain degree of limitation over owner’s exposure as well as accountability at
the time construction since he has already agreed upon a fixed rate.

2. Since the contractor has accepted a fixed price for the construction, the owner is not
liable for any over expenditure. This is the most important benefit.

3. It is much simpler to get construction loan with a Lump sum contract as it provides a
high degree of certainty as far as cost is concerned.

4. It is much easier to supervise and manage Lump sum contracts.

5. The payments are made after fixed durations and that too based on the amount of work
completed unlike the balloon payments in other arrangements.

Advantages of Lump Sum Construction Contract for the

Contractor are as follows:
1. There is a greater margin for profit realization for contractors as well as designers.

2. Due to its general reliability, contractors try to enhance quality of production and performance and try
to complete work faster.

3. Lump sum contracts offer comparatively easier assessment of soil conditions, bidding prices and pre-
construction analysis which makes selection process less tedious.

4. Accounting related to lump sum contracts are low-intensive that diminishes overhead expenses of the
contractor and allow for stable cash flow.

Besides above benefits, lump sum construction contract promote better interaction and
association between the owner, contractor and designer. The contractors encourage
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 effective project execution to earn better profit margin. The owner is also aware of the
expense incurred due to change orders he needs.

Disadvantages of Lump Sum Construction

Contract
1. Lump sum contracts pose greater risk to contractor.

2. Quantifying changes is a big challenge. Such contracts demand documentation and record keeping of
change orders at all stages that further requires more paperwork.

3. Rejection of change order requested by the employer.

4. The building and construction design and plans have to be completed well before beginning the
execution of activities.

5. The overall construction completion could take longer than other contractual alternatives.

6. Since the contract is based on fixed price, the contractor may start using sub-standard means and
methods and products. In such a case, the owner should specify building materials well in advance.

7. Lump-sum contracts usually end up with higher fixed price to cover unforeseen circumstances. Owners
are responsible for unpredicted conditions which are beyond the control of either party.

Matters of Disputes in Lump Sum

Construction Contract
Even though Lump sum contracts are considered ideal for smaller construction projects,
they could lead to dispute and claims arising out of contract agreements. The most
disputable issues are:

1. Unbalanced Bids
Certain projects need submission of payment applications using unit quantities and unit
prices. In such a case, the contractor may produce an unbalanced bid by raising unit
prices on such items required early in the building process like transportation and
insurances and reducing unit price on materials which have to be used later.

2. Change Orders
In case of change order proposals suggested or received by the owner that may demand
increased expenses, the rate quotation could lead to disagreements.

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3. Changes related to Scope and Design
Based on construction procedures and past experience, the contractor can suggest design
changes. Contract provisions should be able to explain how those alterations in plan will
be addressed and who will bear the add-on expenses.

4. Compensation for Early Completion

Lump sum contracts may consist of provision for an early completion compensation for
the contractor.

The above issues emphasize the fact that the fixed price provision in the contractual
document of Lump-sum contract is far from being permanent and are very much liable to
changes and alterations. Undeniably cost certainty is a major hiccup on any project and
lump sum contracts are no different.

Types of Variations in Lump Sum Contracts

Lump sum contract allocates more risk to the contractor when compared to some other
types of construction contracts because the process of tender preparation is more
expensive for the contractor. Therefore, a clear mechanism has to be put in place to
address varying conditions during the course construction by adding necessary
provisions:
1. Variations
In a lump sum contract, even though the amount of work and its price are well defined,
there is always scope for changes or up gradations. To cover such changes, agreements
should include terms for contractors to go ahead with such design, material or quantity
alteration without having to argue about expenses.

It’s essential that contracts include an efficient variation and valuation process.

2. Relevant events
This may include failure on the part of client to procure supplies or provide timely
instructions to contractor or those events over which neither party have any control like
inclement weather condition or natural disasters. In either case, such clauses should be
included in the contracts that provide reimbursement for losses to contractor.

3. Provisional sum
This is usually applicable in cases where the client may not opt to pay for undefined
work. That is why a provisional sum is included in the contract document as an estimate
of the total cost of construction.

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4. Fluctuations in Inflation
Sound provisions should be added to the contracts to suitably compensate contractors in
case of inflations on projects especially those which last for a length of time. The reason
being tenders are based on current price and contractor should be paid in case of price
change that occur during the entire period.

5. There should be clear clauses that include payments to subcontractors and other
suppliers.

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