In a lump sum contract, what is the primary risk assumed by the general contractor?
Correct Answer
A) Material price fluctuations and cost overruns
In a lump sum contract, the contractor agrees to complete the work for a fixed price, assuming the risk of cost overruns, material price increases, and other unforeseen expenses. The contractor must absorb these costs unless covered by change orders.
Why This Is the Correct Answer
In a lump sum contract, the contractor agrees to complete the project for a fixed price regardless of actual costs incurred. This means the contractor bears the financial risk if materials become more expensive, labor costs increase, or unexpected expenses arise during construction. The contractor cannot pass these additional costs to the owner unless there are approved change orders for scope changes. This risk-reward structure is the fundamental characteristic that distinguishes lump sum contracts from cost-plus contracts.
Why the Other Options Are Wrong
Option B: Owner's ability to pay
Subcontractor performance is only one component of the overall cost risk in lump sum contracts. While poor subcontractor performance can lead to cost overruns, the primary risk includes all potential cost increases including materials, labor, equipment, and other project expenses.
Option D: Subcontractor performance only
While the owner's ability to pay is always a concern, this is not the primary risk specific to lump sum contracts. Payment risk exists in all contract types and is typically addressed through payment bonds, lien rights, and credit checks during the bidding process.
Memory Technique
Think 'LUMP SUM LUMPS ALL RISKS ON CONTRACTOR' - the fixed price means the contractor absorbs all cost increases that aren't covered by change orders.
Reference Hint
Florida Building Construction Standards - Chapter on Contract Types and Risk Allocation, or Construction Law section covering contract delivery methods
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