Contracts by payment: lump sum and cost plus

Classification of contracts based on payment

1. Lump sum (fixed price): a fixed total price.
2. Item rate / unit price: payment on measured quantities at unit rates.
3. Percentage rate: a percentage above or below the estimated rates.
4. Cost plus (reimbursable): actual cost plus a fee.
5. Labour (or labour-and-materials) contract.

Lump sum contract

The contractor agrees to complete the defined work, as shown in complete drawings and specifications, for one fixed price. The payment is by stages (milestones) or percentage completion.

• Merits: the client knows the cost at the start; less work in measurement and accounting; the contractor has an incentive to be efficient; the risk of cost overrun is on the contractor.
• Demerits: needs complete design before tender; variations are difficult and costly; the contractor may reduce quality to save cost; the price includes a high risk allowance; not suited to uncertain scope.

Cost plus contract

The client pays the contractor's actual cost of labour, materials, plant and subcontracts, plus an agreed fee (percentage, fixed or with incentive).

• Merits: work can begin early without full design; flexible for changes; suitable for urgent, uncertain and complex works; little risk for the contractor.
• Demerits: the final cost is uncertain; there is no incentive to save, particularly with a percentage fee; needs a strong accounting audit and supervision; the client takes the cost risk.