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Difference Between Lump Sum and Re-Measurement Contracts

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The selection of right contract type is one of the most important decisions taken in a construction project. The contract type determines the method of paying the contractor, how risk shared and how to treat variations in works or quantities. 

The lump sum and Re-Measurement Contracts are the most common types of contracts in construction projects. 

What is lump sum contract? 

In lump sum contract, the Contractor consent to complete the works for a fixed total price. The price is agreed prior to commencement of the works, the price depends on drawings, specifications and the work scope. 

An example of a lump sum contract, is when the contract agrees to build a building of a value of 5M $, this amount will be considered as the contract price and the Contractor is expected to complete the works for the agreed contract price, there is expection that can affect the contract price such as variations or change instructions from the employer. 


What is the Re-Measurement contact? 

In this contract the Contractor is paid according to actual exucated quantities on the field. 

In this type of contract, the employer provides approximate quantities in the BOQ. Then, the Contractor will price each item in the BOQ according to unit price, and during the construction process, quantities are measured and the payment will be quantities times the unit price of the item. 

For example, if the unit price for excavation is 10$ per 1cum, and the actual executed quantity was 12,000cum, then the Contractor payment will be: 12,000x10=120,000$

This means that the contract price can increase or decrease according to the actual quantities execuated at the field. 

The primary differences between lump sum and Re-Measurement contract are:

-The lump sum contract is based on a total fixed price, while the Re-Measurement contract is based on actual executed quantities. 

In lump sum contract, the Contractor bear higher risk if the executed quantities increased beyond quantities in BOQ. While, in Re-Measurement contract, the client bears higher risk as the final ptice is based on the actual executed quantities. 

-Comparison between lump sum and Re-Measurement Contracts:

Item

Lump Sum Contract

Re-Measurement Contract

Contract Price

Fixed total contract price agreed before construction begins.

Final contract price is based on the actual quantities executed and measured on site.

Payment Method

Progress payments are made based on the percentage of work completed.

Payment is made by multiplying the measured quantity of each item by its agreed unit rate.

Quantity Risk

Quantity risk is mainly borne by the contractor.

Quantity risk is mainly borne by the employer.

Cost Certainty

High cost certainty at the beginning of the project.

Final project cost remains uncertain until completion.

Design Requirement

Requires a complete and well-developed design before tendering.

Can be used when the design is incomplete or quantities are difficult to determine accurately.

Administration

Simpler contract administration with fewer quantity measurements.

Requires continuous measurement, verification, and record keeping throughout construction.

Suitable Projects

Buildings and projects with clearly defined scope and quantities.

Roads, bridges, pipelines, earthworks, and other infrastructure projects where quantities may vary.

Variations

Variations may lead to claims, negotiations, and contract price adjustments.

Quantity changes are expected and are paid using the agreed unit rates.

-Advantages of lump sum contract:

The lump sum contract ensures for the employer a higher certainty in the final cost,because the contract value is known from the beginning and this help the employer and enhances the preparation of budgets and financial plans. 

Furthermore, the management of this type of contract are usually easier as there is no need for measuring the quantities of each item. Moreover, this encourage the Contractor to work efficiently, in order to save cost and increase profit. 

And this type is appropriate where the design is complete, work scope is clear and there is low possibility of significant changes. 

Disadvantages of lump sum contract: 

The main disadvantage of lump sum contract is the requirements of a complete and precise contract documents. The incomplete documents and unclear work scope will result in disputes during the execution. 

Furthermore, that contractors may add contingency amounts to their prices to cover the possible risks which will result in increasing the tender price. 

Other disadvantages of this type of contract is variation orders which may be considered a source of claims. Changing the design or work scope by the client, can result in contractor submitting a request for time extension and additional cost. 

-Advantages of Re-Measurement contract:

Re-Measurement contract is flexible especially when the quantities are not fully confirmed. This type of contract is useful in infrastructure projects, excavation works, pipeline and projects that may changed based on project conditions. 

In this type of contract, the Contractor is fairly paid for the actual executed works. If the quantity increased, the Contractor will get additional payment and if the quantity decreased, contractor will get less payment. 

Moreover, for contractor, this contract reduce the pricing risk because no fixed total price is given for unconfirmed quantities. 


-disadvantages of Re-Measurement contract:

The main disadvantage of Re-Measurement contract is that the final cost of the project is unknown at the project beginning. Employer will start with approximate contract value but the final contract value may increase or decrease according to actual quantities. 

Furthermore, this type of contract need more management, Engineers and site team will spend more effort as they need to accurately measured the executed works and verify it regularly. 

Moreover, disputes may occur in case there is no agreement in measurement methods or actual quantities. Or if a specific item is included in BOQ or no. 

Example of lump sum contract: let assume that a client want to build a small building, the drawings and specifications are available and complete. And the Contractor give his price of 2 millions. 

Contractor will be imposed to higher risk, for example If the Contractor finds that some items is costing more than priced, the Contractor will bear this risk unless the inrease of cost is due to change arised from the employer or an event that can allow the adjsuting of contract value. 

This type of contract gives employer higher degrees of certainty because the project cost is fixed. 


-Example of Re-Measurement contract:

Let assumw that there is a road project that involve approximate excavation quantity of 50000 cum, and the Contractor price the excavation for 8 $ per cum

The estimated excavation value: 50000x8=400000 $

But if during the execution, the actual excavation price become 60000 cum. The final payment will be:

60000x8=480000 $

In this case the employer pays higher amount due to increase of the quantity. 

-when the lump sum contract is used? 

+design is complete. 

+work scope is clear

+quantities precisely determined 

+work condition are reasonably predictable 

+employer prefer to have high certainty in cost

+few variatiom expected. 

-when Re-Measurement contract is used:

+difficulty in identifying quantities precisely 

+soil or site condition is not confirmed 

+project includes excavation or earthwork

+design may change during execution 

+employer needs higher flexibility 

+project is related to infrastructure such as highways, bridges, tunnels, pipelines, etc. 

Risk Allocation

In lump sum contract, contractor bears higher risk, contractors will bear the risk of quantities variation from BOQ, productivity issues, increase in cost, exeption for the variations that arised from the employer or contractual event that permit the compensation 

In a Re-Measurement Contract, the employer carries more risk for quantity changes because payment is based on the actual measured work.

This does not mean one contract is always better than the other. The best choice depends on the nature of the project and the level of certainty available before construction start. 

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