--- title: "Contracts by payment: lump sum and cost plus" subject: "Construction Management" chapter: 5 key: "semester_8/construction_management:lump-sum-cost-plus" source: https://www.bctengineer.com/q/semester_8/construction_management/lump-sum-cost-plus site: BCT Engineering --- # Contracts by payment: lump sum and cost plus Construction Management · Chapter 5: Contract Management - Asked in: 2071 Bhadra, 2+2+4 marks - Video: [Construction Contracts Compared | Lump Sum, Cost Plus, Re-measurable & Target Cost](https://www.youtube.com/watch?v=r-fkbn0YPs0) — Metroun Quantity Surveying - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_8/construction_management/lump-sum-cost-plus - Whole chapter: https://www.bctengineer.com/md/semester_8/construction_management/chapter-5 ## Question Classify contract based on payment. Explain lump sum contract and cost plus contract. ## Short answer Contracts based on payment are lump sum, item rate, percentage rate, cost plus, and labour. A lump sum contract pays a fixed price for complete defined work, giving cost certainty but requiring full design. A cost plus contract pays actual cost plus a fee, allowing early start but with uncertain final cost and little incentive to save. ## Answer #### 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. ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. In a lump sum contract, what is fixed? A. Actual cost plus a fee B. Unit rates for measured quantities C. A percentage over the estimate D. One total price for work defined by complete drawings and specifications Answer: D. Lump sum needs complete design and a fixed price paid by stages. (Key point: Lump sum definition) 2. Which is a demerit of lump sum? A. Variations are difficult and costly, and the contractor may reduce quality B. Final cost is uncertain C. The client carries all cost risk D. Work can begin before design is done Answer: A. The fixed price gives cost certainty but makes changes costly. (Key point: Lump sum demerit) 3. In cost plus, what does the client pay? A. A fixed total price only B. Actual cost of labour, materials, plant and subcontracts plus an agreed fee C. The BOQ quantities times rates D. Only the profit Answer: B. Cost plus reimburses actual cost plus a fee. (Key point: Cost plus definition) 4. Why is a percentage-fee cost plus contract risky for the client? A. The contractor carries all cost risk B. Work cannot start early C. There is no incentive to save cost and the final cost is uncertain D. Design must be complete first Answer: C. Fee grows with cost, so the contractor has no incentive to economise. 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