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Traditional Lump Sum Contracting

Lump Sum Contracting, often referred to as “traditional”, is used to describe the sequential “design-bid-build” system which involves competitively bid lump sum construction contracts based on complete and descriptive contract documents prepared by architects and engineers, and made up of drawings, specifications, and supporting information.

 

Under this Project Delivery System, the Owner is responsible for contracting with both the Design Team and the General Contractor for a project. These two parties are not contractually bound, and often have different interests in the process.

Public Bid Process

The process begins with the “owner” entering into a contract with a designer/ architect to develop descriptive drawings and written specifications for the proposed project. Once completed, these documents are made public to general contractors, who then submit sealed bids to perform the work. Once all bids have been received and publicly opened, the lowest bidder (providing that the bid meets all the requirements of the documentation) is awarded the project. The General Contractor is then responsible for executing the project, dealing directly and indirectly with all subcontractors, tradesman and material suppliers required to complete the project. Projects that include upwards of 40-50 subcontractors are not unusual for a large public project.

Prequalification

Since public owners are largely bound by law to award a contract to the lowest bidder and to allow all qualified contractors to bid for work, it is often necessary to prequalify those contractors interested in bidding a project. The prequalification standards must be clearly defined using defensible criteria such as experience in jobs of similar complexity, current work load, and demonstrated financial stability. Bonding capability is also frequently used as a primary qualifying criterion.

This Project Delivery System has been used extensively within the public arena for years primarily because it is the “traditional” method and because it is the easiest to implement within the public bid process. However, there are issues to consider before selecting this system for a construction project.

Considerations

  • The design-bid-build sequence may require a great deal of time
  • Prequalification is a crucial step to eliminate possible bidders who may not have the skills or experience to successfully complete the project
  • The system does not allow owners to assess the value of intangible benefits offered by bidders
  • The increasing complexity of building construction and intensified regulation make it difficult to prepare a final set of contract documents before starting a project
  • All of the bids may exceed the designer’s estimate of cost, which can lead to delays, possible rebidding and even cancellation of projects
  • Increased costs beyond the lump sum are common, and must be incurred through formal amendments that are agreed upon by the owner and contractor – this process can be time-consuming in the public arena

Adversarial relationships can readily develop because the three principal parties have different financial goals:

  • The owner desires the best possible building at the lowest possible cost
  • The architect wishes to satisfy the owner while meeting professional and aesthetic requirements
  • The contractor wants to complete the construction work within the time and price specified in the contract
  • Differences in the interpretation of contract documents are frequent
  • Because of different goals, lump sum projects frequently produce claims that must be resolved

Risk Factors

  • Schedule overruns caused by the owner: the owner is as risk for a claim by the contractor for damages for delay, based on the fact that extended schedules increase contractor costs
  • Casualty losses: materials already built into the building are typically considered the owner’s property, and the owner is well-advised to carry fire and casualty insurance
  • Safety: while the contractor and subcontractor carry most of the risk, the owner is not immune from litigation should an injured worker or visitor sue for negligence