Three Ways to Assure Successful Stipulated Sum Contracts

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["b"],["i"],["strong"]],"sections":[[1,"p",[[0,[],0,"May 4, 2022"]]],[1,"p",[[0,[],0,"One of\nthe oldest and most common construction procurement methods is the fixed-price\ncontract, also known as lump sum or stipulated sum contracts. "]]],[1,"p",[[0,[],0,"A stipulated sum contract is exactly\nwhat the name suggests\u2014a construction agreement in which the owner and\ncontractor agree to a predetermined, set project price to complete a project. The\nAIA Document A101\u2122\u20132017 is a familiar fixed price standard form of agreement\nbetween owner and contractor. From financing to paperwork, these contracts are comfortable\nfor both parties when a project is well-defined. It\u2019s often used in\nstraightforward projects such as strip mall or warehouse projects, in essence,\nprojects where the cost to build is very well understood. "]]],[1,"p",[[0,[],0,"However, while seemingly simple, stipulated\nsum contracts require some attention to detail to realize the best results for\nboth owner and contractor. "]]],[1,"p",[[0,[],0,"Here are the three of the most\ncommon areas of misunderstanding or disagreement: "]]],[1,"p",[[0,[0],1,"Clarity of Work Scope:"],[0,[],0," One of the most common issues in a stipulated sum contract\nis ambiguity in the work scope, specifically for allowances, unforeseen\npurchases or other variables that could change the work scope or drive up the\ncost of construction. Material allowances are often a source of misalignment. For\ninstance, the owner expects high quality subway tile in all homes of a\nsubdivision, but the contractor assumes a low grade tile in the bid. Whether\nyou are the owner or the contractor, make sure all parties understand the\nquality of materials to be used, and that those choices are documented,\nparticularly in these times of supply chain disruptions. "]]],[1,"p",[[0,[0],1,"Contingency Confusion:"],[0,[],0," Many contracts\ninclude contingencies, money held in reserve to cover unexpected costs that could\narise during a construction project. While everyone agrees that money should be\nheld in reserve, some forget to outline where that money goes if it\u2019s not used\n\u2013 the contractor or back to the owner? In a typical lump sum arrangement where\nthe contingency is included in contract sum, the unused contingency will likely\ngo to the contractor. Be sure everyone understands where this money goes if not\nused before contract signing."]]],[1,"p",[[0,[0],1,"Progress Payments:"],[0,[],0," Stipulated sum contracts\ntypically include detailed progress payment percentages\u2014those partial payments once a contractor completes a predefined\nstage of work. No matter the type of work, make sure that all parties\nunderstand the process required to receive progress payments and the timeline\nfor submittal. "]]],[1,"p",[[0,[],0,"If you\u2019re an owner with a project\nthat has a clear scope of work, fully detailed design and a small chance of\nunforeseen conditions, the stipulated sum contract is likely a good procurement\nmethod for all parties. But remember, stay fixed and focused: Be clear about\nthat scope (limit the variables), define contingency spend and clearly outline\nthe progress payment schedule. "]]],[1,"p",[[0,[1,2],2,"AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors. "]]]]}