Lump Sum Construction Contract: Definition, Examples, Pros & Cons

February 4, 2025

What is a Lump Sum Construction Contract?

A lump sum construction contract is a fixed-price agreement where a contractor agrees to complete a project for a predetermined amount.

Unlike cost-plus or time-and-materials contracts, where the price can change, lump-sum contracts keep costs predictable for project owners.

The contractor takes on the financial risk, meaning they must cover the extra expense if materials or labor costs increase. But if they complete the work for less? They keep the savings.

This type of contract is popular for straightforward projects with a clear scope—like residential homes, small commercial buildings, or government-funded projects.

How Does a Lump Sum Contract Work?

Lump sum contracts follow a structured process. Here’s how it usually unfolds:

  1. The project scope is defined. Before signing, the project owner and contractor agree on all details—materials, timeline, and specific deliverables.
  2. The contractor submits a proposal. The contractor estimates costs and submits a lump sum bid that covers everything: labor, materials, equipment, and profit.
  3. The contract is signed. Once the owner accepts the bid, a legally binding contract is signed. This contract outlines payment milestones (e.g., after foundation, framing, or completion).
  4. The project begins. The contractor manages the work within the agreed price. Payments are made based on progress.
  5. Change orders and adjust the price if needed. If the owner requests additional work, a change order is required, which can increase the contract price.

Lump Sum Contract Example

Let’s say a homeowner wants to build an extension.

The contractor agrees to complete it for $75,000, including materials, labor, and permits.

If lumber prices increase during construction, the contractor absorbs the extra cost. But if they find a supplier discount, they keep the additional profit.

If the homeowner later decides to add a skylight, a change order is created, and the total price goes up.

This is how lump sum contracts work—fixed pricing with flexibility for additional work.

Advantages of Lump Sum Contracts

Lump sum contracts are straightforward and predictable, making them a popular choice in construction.

  1. Fixed cost. The project owner knows exactly what they’ll pay, making budgeting easier.
  2. Less paperwork. Unlike cost-plus contracts, tracking every material or labor cost is unnecessary.
  3. Contractor efficiency. Since the contractor profits from completing the project under budget, they have an incentive to work efficiently.
  4. Easier financing. Banks and lenders prefer lump sum contracts because they provide clear cost structures.

Disadvantages of Lump Sum Contracts

While lump sum contracts provide certainty, they also have downsides.

  1. Limited flexibility. Formal change orders are required if the project scope changes or progress slows.
  2. Higher initial price. Contractors factor in risk, often bidding higher to cover unexpected costs.
  3. Quality concerns. To protect their profit, contractors may cut corners on materials or labor.
  4. The contractor takes on the risk. If costs rise unexpectedly, the contractor absorbs the loss, which can lead to disputes or unfinished work.

Lump Sum vs. Other Construction Contracts

Lump-sum contracts aren’t the only option. Here’s how they compare to other common contract types:

Contract TypeHow It WorksBest For
Lump SumFixed total priceSimple, well-defined projects
Cost-PlusOwner pays actual costs plus a feeCustom projects with unpredictable costs
Time & MaterialsOwner pays for time worked & materials usedSmall projects with unknown scope
Unit PricePrice is based on each unit of workInfrastructure projects with repetitive tasks

Lump sum contracts are ideal for predictable projects where the scope won’t change much. However, if flexibility is needed, other contract types may be a better fit.

When to Use a Lump Sum Contract

Not sure if a lump sum contract is right for your project?

✅ Use a lump sum contract if:

  • The project scope is well-defined
  • There’s little chance of unexpected changes
  • You want cost certainty

❌ Consider another option if:

  • The project is large and complex
  • There’s a high risk of scope changes
  • Material prices are volatile

How to Manage a Lump Sum Contract Efficiently

Managing a lump sum contract means staying on budget and avoiding surprises. The best way to do this? Use construction budgeting software.

Planyard makes lump sum contract management easy.

Planyard helps contractors and project owners track costs, payments, and profitability—all in real-time.

🔹 Track actual costs vs. budget automatically
🔹 Manage invoices and change orders in one place
🔹 Prevent overspending with built-in alerts
🔹 See profit margins before it’s too late

Instead of relying on spreadsheets and manual tracking, Planyard automates everything—so lump sum contracts stay profitable and well-managed.

Final Thoughts

Lump sum construction contracts are simple, structured, and cost-predictable. They work best for projects with a clear scope, but they can be inflexible when changes arise.

For contractors and project owners, the key to a successful lump sum project is accurate budgeting and cost tracking.

🔹 Want to manage lump sum contracts without spreadsheets? Try Planyard today

Upload the project budget using your own cost codes, and follow the financial progress in real-time

No credit card required. No sales or IT support needed.