Lump Sum Contract Vs. Itemized Contract: Which One Is Better?

Are you among those people who are afraid of a lump sum contract?! So this article is for you!

Here, we want to explain why a lump sum contract is a better option than an itemized contract in a home renovation project for both the contractor and the homeowner! 

Let’s get started!

What is a Lump Sum Contract?

A lump sum contract, sometimes referred to as stipulated-sum, is a type of agreement for construction projects where the contractor agrees to complete the entire job for a predetermined, fixed price. It’s essentially like agreeing on a total cost upfront. This makes the whole construction process simple for both you and the contractor. It works best when the project details are clear and well-defined from the start.

The contractor gives you a set price to complete the entire project based on the scope of work.  They can’t charge you more for those things unless something major changes.

That detailed scope of work is key! Without it, there could be confusion about what’s covered and what’s not. This can lead to arguments and unexpected costs down the road.  Reputable contractors, like Matrix, will discuss the breakdown of the project costs with you, even though there’s a fixed price. This helps build trust and avoids confusion.

Why Do We Offer a Total Price (Lump Sum) Instead of Breaking It Down Upfront?

There is a common belief that people have to avoid contractors with a lump sum contract! But now, we want to tell you why a lump sum contract is a win-win for both parties!

Hidden Issues

Construction projects can sometimes uncover hidden issues, like needing extra electrical work in bathrooms that weren’t planned for. A lump sum price includes a buffer for these surprises, ensuring the project gets finished without you having to pay extra every time something pops up. We will discuss change orders in the next section in detail.

Coordinated Effort

We believe our strength lies in coordinating everything to run smoothly. If we break down the price by each expense (electrical, plumbing, etc.), you might be tempted to shop around for the cheapest electrician or plumber. But here is a fact that everyone needs to know:

The best price on each part doesn’t guarantee a smooth overall project. 

We are like an orchestra conductor –  we make sure all the musicians (subcontractors) work together at the right time to create a beautiful symphony (finished renovation).

Stress-Free Management

With a lump sum, we take on the responsibility of managing all the subcontractors, material deliveries, and project timelines. This frees you up from the stress of coordinating multiple vendors and chasing down schedules.

Easier Financing

With a fixed price, lenders can more easily estimate how much to loan you for the project. This can make securing financing smoother. Also, unlike itemized contracts, you might not need as much extra cash for unexpected costs.

Bulk Discounts

General contractors often get better deals on materials because they purchase in bulk for multiple projects. This can translate to some cost savings that might not be reflected in a per-item breakdown.

Focus on Results

Lump sum pricing enables both the homeowner and contractor to concentrate on the overall scope of the work, ensuring optimal renovation results. Itemized pricing can be confusing for customers, as not everyone comprehends every item included in the scope of work. Some individuals might erroneously believe they can save money by purchasing their own materials, hiring a cheaper plumber, or conducting the demolition themselves. However, professionals understand that these assumptions are incorrect. Dealing with such matters can easily distract both the homeowner and contractor from prioritizing the task at hand.

Why Does a Lump-Sum Contract Matter?

Imagine hiring individual subs who only care about doing their part as fast as possible, without considering how it fits with the rest of the job. A general contractor is there to make sure everyone works together efficiently, preventing delays and problems further down the line. 

Traditionally, construction is viewed as a shopping list. However, a successful project is more like a system where every part works in harmony. Itemized contracts get bogged down in details, distracting you and the contractor from the bigger picture.

A lump sum contract is the key to keeping your project running smoothly and on track.

Change Orders in a Lump Sum Vs. Itemized Contract

As we discussed earlier, a lump sum contract means the contractor agrees to complete the entire project for a set price, regardless of their actual costs. This might lead you to wonder: Does that mean there are never any change orders with lump sum contracts? Unfortunately, that’s not quite realistic. Change orders are common in renovation projects.

However, change orders are different in lump sum and itemized contracts.

In a lump sum contract, the contractor covers all costs for items within the scope of work as initially estimated. For example, if replacing an electrical panel was estimated at $2,000, but the actual cost is $4,000, the contractor absorbs the extra cost without charging the client.

However, in an itemized contract, the contractor charges for each itemized task. If the cost of the electrical panel increases from $2,000 to $4,000, this will be billed to the client as a change order.

Now, do you see the difference?!

Change orders in a lump sum contract only apply to situations outside the original scope of work.  Continuing the electrical panel example, if we discover the panel needs relocating after starting the job, that’s unforeseen and would be a valid change order. You’d be responsible for the additional cost of relocation, but not the increased cost of the panel itself.

With a lump sum contract, you get the security of a fixed price and avoid the worry of surprise charges for unforeseen issues.

A Lump Sum Contract is Not Always the Best Option!

Not all construction projects are perfect fits for a lump sum contract. These contracts set a single price for the entire job upfront. Sounds great, right? Well, it can be, but only if you’re working with a very experienced contractor.

Why? Inexperienced contractors might underestimate the costs involved. This means the price they quote might be too low. Sure, change orders are bound to happen during any project, but with an inexperienced contractor, these changes could be much more frequent and expensive.

Imagine you think everything is covered by the initial price, then get hit with a huge bill for extra work. This can cause a big distrust between you and the contractor. You’ll feel ripped off, and they’ll feel like they’re not getting paid fairly for the additional work they have to do. Nobody wins!

That’s where we come in! At Matrix, our experience allows us to accurately estimate project costs. This means a lump sum contract with us is the best way to avoid unexpected expenses down the road.

How Matrix Works?

At Matrix, we believe a lump sum contract is the best way to avoid surprises for you!  Our experience allows us to create a detailed scope of work that outlines exactly what’s included in the project for a clear and upfront price.

We understand that transparency is key. That’s why we don’t just give you a number.  We’ll sit down and discuss all the details of your project with you. This way, you know exactly what you’re getting for your money.

Here’s how it works:

The scope of work lists all the materials and labor needed to complete your project.  There might be additional documents involved depending on the project, but the key ones are:

• Contract details
• Project plans
• Schedule
• Bill of materials

Using this information, we can accurately estimate the cost of your project and include a buffer for unexpected things. This way, you get a clear picture of the total price upfront. 

What makes us different is that after the agreement, you will get the itemized scope of work, and we can discuss it with you! This allows us to walk you through each item and its associated cost, ensuring complete clarity before we begin.

Of course, things might change along the way. That’s where change orders come in. If something needs to be adjusted outside the original scope, we’ll discuss it with you and submit a change order outlining the additional cost and timeline impact. Once you approve, the project scope and price are officially updated.

We believe in clear communication. We’ll develop a detailed plan, explain everything thoroughly, and address any concerns you have before we move forward.

Conclusion

Ready to transform your home? A lump sum contract with Matrix Construction ensures a stress-free renovation. We understand concerns about hidden costs or quality compromises in lump sum agreements. However, at Matrix, transparency is paramount.  You’ll receive a detailed scope of work breakdown after the agreement, and our successful track record speaks for itself.  Unlike some contractors who may underestimate costs and abandon projects,  we prioritize meticulous planning and see your renovation through to completion.  Choose Matrix and experience the peace of mind that comes with a perfect outcome, delivered on budget.