Means of Compensation: Understanding Pricing Structures in Construction Contracts

Means of Compensation: Understanding Pricing Structures in Construction Contracts

At D. Hart Consulting, we know that a key factor in determining the type of contract document for a project is the pricing structure, or how the contractor will be compensated for their services. This decision is closely linked to the method of selecting the contractor. Here, we explore several common pricing structures available to owners.

Lump Sum (Stipulated Sum)

A lump sum, or stipulated sum, is a fixed contract price. This pricing structure is typically used when the contractor is selected through competitive bidding. The contractor agrees to complete the work for a set price, which is usually paid in periodic installments based on stages of completion or other milestones outlined in the contract.

In a lump sum contract, the owner may not be privy to the specific amounts the contractor pays to subcontractors and suppliers. As long as the contractor fulfills their contractual obligations, they are not required to disclose these details to the owner.

Unit Prices

When the scope of work is well-defined but the quantity is uncertain, a unit price contract may be used. This is a form of lump sum contract where the price is based on a specific unit of measurement. For example, in paving contracts, the price might be stated in dollars per foot of asphalt or concrete.

Stay tuned for our next post where we discuss the cost-plus pricing structure and its flexibility across selection methods.

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