In a lump sum contract for $750,000, the contractor discovers that quantities for a major work item were significantly underestimated. The contractor has no basis for a change order. Who typically bears the financial risk?
Correct Answer
B) The contractor
In lump sum contracts, the contractor assumes the risk for quantity variations and estimating errors unless there are grounds for a legitimate change order due to unforeseen conditions or design changes.
Why This Is the Correct Answer
In a lump sum (fixed-price) contract, the contractor agrees to complete the work for a predetermined amount regardless of actual costs incurred. This contract type inherently transfers the risk of cost overruns, including quantity estimation errors, to the contractor. Since the contractor has no basis for a change order (meaning no unforeseen conditions, design changes, or owner-directed modifications), they must absorb the additional costs. The contractor is responsible for accurate estimating and bears the financial consequences of underestimating quantities.
Why the Other Options Are Wrong
Option A: The risk is shared equally
The owner is not responsible for the contractor's estimating errors in a lump sum contract. The owner has fulfilled their obligation by providing the contract documents and agreeing to pay the fixed contract price. The risk transfer is specifically designed to protect the owner from cost overruns due to contractor performance issues.
Option C: The architect
The architect is not financially responsible for the contractor's quantity estimation errors. While architects may have professional liability for design errors, they are not parties to the construction contract and do not assume financial risk for contractor estimating mistakes or performance issues.
Memory Technique
LUMP SUM = 'Contractor's LUMP of responsibility' - they swallow the whole cost, no sharing
Reference Hint
Florida Building Code, Chapter 1, Section 109 - Construction Documents and Permits; AIA Contract Documents A101 - Standard Form Agreement
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