Final answer:
A lump-sum contract is a prevalent type of agreement in the construction industry that provides a fixed price for the entire scope of a project, shifting most financial risk to the contractor.
It simplifies billing and reduces administrative burdens, offering project cost certainty to the owner.
Step-by-step explanation:
A lump-sum contract is a common agreement used in the construction industry where the contractor agrees to complete the project for a fixed price that covers all labor, materials, and other expenses.
This type of contract can be beneficial as it provides the owner with certainty regarding the total cost of the project. The contractor will provide a single price for the entire scope of work to be done, as defined by the contract plans and specifications.
Contrary to breaking down the project into separate work packages with individual prices, a lump-sum contract simplifies the billing and reduces administrative overhead.
It is incorrect to say that this type of contract is very risky for an owner to use; the risk primarily lies with the contractor, who must accurately estimate project costs and adhere to the budget to make a profit. While it is not without risk for the owner, particularly if project specifications change, it does offer cost stability.
Lump-sum contracts are frequently used for projects where the scope is clear and unlikely to change significantly.