Which of the following Is Not the Normal Reason for a Change in a Lump-Sum or Fixed Price Contract

As with cost-plus and T&M contracts, project leaders benefit from single-price contracts if they have a general idea of the project to be carried out but the concrete planning is not completed. For example, you can set a price per square foot for flooring and installation, even if you don`t know exactly how many square feet of flooring you need to cover. Since you know roughly how much materials and labor would cost, you can set a unit price for this and other aspects of a construction project. Contractors can get a good approximation of the costs and revenues of each step under control. Owners and contractors can customize the project as needed without having to submit change orders and renegotiate prices, as they would with a lump sum contract. A notable shortcoming is that there is a significant risk of cost overruns, as these contracts do not usually have a single threshold. The changes that occur during the project can be time-consuming and paperwork-heavy. A contractor must receive a change order from the owner for each scope adjustment. Change orders are the only way to protect the scope from intrusion and redesign of the contractor`s end result.

(b) in the case of contracts which do not require the submission of certified cost or price data, the contracting authority shall obtain adequate data to determine the basic level of the adjustment and may request verification of the data submitted; A fixed-price contract with a new retroactive pricing is appropriate for research and development contracts estimated at or below the simplified acquisition threshold, where it is established from the outset that a reasonable and reasonable fixed price cannot be negotiated and the amount and short duration of the service in question make it impracticable to use another type of fixed-price contract. All major standard form agreements deal with changes in work, usually as part of the terms and conditions. For example, in AEOI-A201 2017, amendments are dealt with in Article 7, while in AGC ConsensusDocs 200, amending provisions are included in Article 8. Standard form agreements all assume that change orders are written documents. Customs treaties often explicitly stipulate that there can be no oral amendment to the contract and that only signed and written change orders are binding on the parties. Contractors like lump sum contracts because they offer some autonomy and freedom to get the job done. Owners like lump sum contracts because they know exactly what the project will cost them in the end. You don`t have to worry about excessively inflated working hours or material markups. The price is what it is. Cost-plus contracts are similar to lump-sum contracts in that the owner agrees to bear the contractor`s costs, including labour, subcontractors, equipment and materials, as well as an amount for the contractor`s profits and overheads. But instead of a lump sum to cover all expenses, these expenses are reimbursed individually. Paperwork when it comes to time and materials is more complicated than lump sum – it needs to be carefully accurate to cover all your costs.

Even dishonest entrepreneurs can still inflate the number of working hours to increase their profits. However, there are fewer reasons to increase material costs because there is no percentage related to them. Not all of them are roses for homeowners in a higher-cost program. This agreement does not encourage a contractor to get the best price for materials. On the contrary. Since profit is a percentage of the cost, the more expensive the material, the greater the profit. When all these elements are aligned, lump sum contracts provide a simple agreement that owners and contractors can easily understand and agree on. But what are the advantages and disadvantages of a lump sum contract? The advantages for owners include simplified accounting and low financial risk, and the disadvantages include the rigidity of the project scope and the need to plan every detail before starting the project. The benefits for contractors include clear instructions, less paperwork, and profit potential if the project is well under budget, and the downsides are risks if the project is more expensive than expected. Lump sum agreements generally encourage a higher level of collaboration between the owner, contractor and designers, as well as a more sociable work arrangement. The contractor protects his margins through tight project management and usually through communication with the owner to ensure compliance with the scope. The owner is generally better informed of the cost of the change orders he needs; Just as the entrepreneur agreed on a certain amount of work, so does the owner, who tends to hold back ideas at the last minute.

The paperwork associated with a lump sum contract is much less detailed than most other contract forms. There is less need for the contractor to provide detailed BILLS of materials or provide subcontractor and supplier quotes to the owner. This absence of breakdown allows the entrepreneur to postpone costs and hide his real profit. In both cases, some variants require a formal request for a change order from the owner or contractor. Change orders must contain four key points: In the case of federal projects, many projects are executed under a fixed-price contract, which is very similar to a lump-sum agreement. The government prefers these contracts and believes they are the best way to use taxpayers` money for acquisitions and projects. According to the Federal Acquisition Regulations (FAR), there are several options for fixed-price contracts that cover most scenarios. Unlike cost-plus contracts or time and material contracts, initial mobilization costs are less likely to strangle the contractor under a lump sum contract. They have to spend less of their own money at launch before the first progressive payment is made. Although lump sum contracts are quite categorical in terms of scope and cost, preliminary or agreed sums refer to the price of the optional work of the project.

The preliminary amount is included in the contract as a separate estimate and only changes if the owner decides that it is a good idea to proceed with the election work. Lump sum contracts are the simplest form of construction contracts. They are easy to create and easy to understand. The contract documents clearly indicate the work involved and the amount of money the contractor expects at the end of the project. Successfully using a lump sum contract means correctly anticipating the project schedule, all material and labor costs, and knowing how much should be built into the price for a profit margin and overhead. In addition, this contractor should be more sure that the owner will not try to request changes throughout the life of the project. Change orders exist due to the dynamic and complex nature of construction projects; For most projects, it is simply not possible to anticipate every challenge or variable in the first place. Errors or ambiguities in plans, the owner`s desire to make aesthetic changes to the project, and the owner`s need to reduce costs can all be resolved by a change order. .