Lump Sum? Cost Plus? I'm lost

Trying to decide between a Lump Sum contract or a Cost Plus contract, but don't know the difference? You've found the right place.

A Lump Sum or Stipulated Sum contract is an agreement where the price for a certain scope of work is set before the project begins. Lump Sum agreements are used quite a bit in the construction context and are most effective when there are not many "unknowns". For instance, if an architect has designed a full set of house plans for you to build a new home, it is very easy for you to take those plans to a contractor and have the contractor give you a set price to build what the architect designed.

Conversely, if you find yourself wanting to renovate a 75 year old home, it might be hard for a contractor to take your architect's plans and give you a set price for the work since the contractor has no idea what he may find when he opens up the walls. A good Lump Sum agreement certainly considers the potential of these unknowns (and other scope changes), but the changes can create a whole myriad of other "change order" problems. (a topic for another day).

An alternative to the Lump Sum arrangement is a Cost Plus model. A Cost Plus agreement is a contract where the contractor bills the owner for the cost of the work, plus a fee. The fee is usually a percentage of the cost (i.e. "Cost plus 12%" means the cost of the work plus the contractor's fee of 12% of the cost of that work), but can also be a set amount (i.e. Cost plus $25,000). Accordingly, in a straight Cost Plus scenario, unknowns and scope changes wouldn't have the same "change order" problem as in the renovation example above because regardless of the unknown work that will need to be done, you've already agreed that you will pay the contractor for the cost of the work, whatever it ends up being, plus his fee.

We will examine the other pros and cons of Lump Sum and Cost Plus agreements as well as the various variations of Cost Plus agreements in subsequent posts.