Lump Sum Projects 101

There is a tendency to executing projects under a Lump Sum (LS) type of contract. Let us review under which circumstances is a Lump Sum contract recommended to achieve the Project main objectives of Quality, Time, Budget and Safety:
• Unless the detail Engineering and Design (E&D) is completed a Lump Sum (LS), type contract must not be used
• A LS project cannot be split in pieces among several contractors, so Contractors must be evaluated regarding their multidisciplinary craft and coordination resources and abilities
• Sub-Contracting by the main LS contractor must be under predefine rules and be legally bind
• Lump Sum projects must be aware of Long-Term Items procurement because those need to be purchased during early E&D
• Mobilization and Demobilization times must be accounted for in the master plan as normally large contractors need time to gather resources and build/find infrastructure for local shops, warehousing and accommodation
• Experienced Contractor are a must for LS Projects
• Financial strength of LS bidders must be verified
• Organization charts up to the third level must be approved by the owner
• Specific targets, procedures and regulations under which the LS contract will be executed must be clearly defined and agreed upon for all parties to the contract
• Responsibility and Risk sharing in case of Lump Sum projects is shifted towards the LS Contractor
• High level Project Sponsors, with delegated power to solve problems, must be appointed and the financial delegation and authorities well defined through the whole organization chart
There may be some others interesting issues in a LS Project, but the most important one is the need to have E&D complete before committing to a LS Contract and the main reason of that is cost, without a proper completed E&D the cot estimate for the project will be, at best, an order of magnitude estimate, if contingency and risk are considered the bids for a LS could be very high or worst very unrealistically low in bot case the Owner will pay a lot more than it would be if this requirement for LS project is followed.
Nowadays the use of Lump Sums contracts is used without proper betting the circumstances under which this type of contract is beneficial

Author: thevenezuelanrepublican

An immigrant from a destroyed country: Venezuela, who found a new welcoming country the USA

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