What’s the Difference Between and Lump Sum and Itemized Contract?
When starting a construction project, determining which type of contract you will use with your general contractor is very important, and often an overlooked step. There are two options to choose from: a lump sum contract or an itemized contract. In summary, if the contractor offers a lump sum contract, it’s a red flag and not a good way to start off your professional relationship. Unfortunately lump sum contracts usually cause serious issues between the client and the contractor.
Why is such a bid deal? Well, in short, a lump sum contract is when not every piece of the project is broken down and itemized, while an itemized contract shows every step and piece of the project. To explain how this all works here is a current situation we are working with.
Currently, we are working on a large project in La Jolla, California, and in this remodel we inherited a contractor and part of his original contract, which turns out was a lump sum contract. This means that the contract was broken out into chunks instead of itemized. For example, it said things like Demo Kitchen - $15,000 ; Kitchen Remodel - $34,000, and additional lump sums like that. So the individual tasks weren’t itemized out such as sink - $445 ; installation of sink - $120. During the remodel when a wall was taken out, it was discovered that there was going to be a lot more work and repair needed, which would require more supplies and labor than expected.
Since the contract was a lump sum contract, the homeowner was under the impression that this new work was included, and that the way the contract was written was similar to an all-inclusive price. However, since the old contract’s costs went up, he decided to send the client change orders with the new information and that created a feeling of distrust between the homeowner and the old contractor. It was a loose-loose scenario - the homeowner felt they were being overcharged for new work needed and the old contractor felt he wasn’t getting paid for additional work needed outside the original scope.
All this is mitigated with itemized contracts. In this specific scenario it would have looked like this: (these are all made up prices to show an example)
wall demo - $550
electrical and outlets for walls in kitchen 344 ft. - $1,500
paint and painting labor for kitchen walls, 600 ft. - $2,000
and when the additional work was found when the wall was demoed - a new item would have been added to the contract stating :
fix new water leak found in the kitchen wall and install new piping throughout kitchen - $5,000
There would be no confusion on what is included and what isn’t. Also, the homeowner feels safe and assured that they aren’t getting overcharged for things that should be included. If the homeowner and contractor had decided on an itemized contract, the homeowner could have then gone down the list to see exactly what this would cost and exactly what they are paying for. This also makes it easier on the relationship between the contractor and owner as the owner can already see what is included in the price, and the contractor has something to reference whenever there is a change order.
Since becoming the new General Contractor on the La Jolla project we have implemented itemized pricing in the contract and the homeowner is loving it. They are thrilled not only by the work we are doing but the workflow and communication throughout the entire remodeling process.
It is a common mistake for homeowners to agree to a lump sum contract and for contractors to offer this contract. Why do contractors even offer lump-sum contracts? It is usually due toa lack of knowledge around how much a project and supplies are going to cost. In a lot of remodeling cases, you won’t truly know the scope of the project until you start the demo process and tearing walls apart. This is because each builder is a bit different and you won’t truly know what you are working with until you can see how all the walls, electrical, piping, etc, is set up. This also means that a large number of change orders are common with lump-sum contracts since most contractors can’t always properly estimate how much a project will end up costing.
Change orders do come up when the homeowner wants to make changes to the original plan or when a change arises in the project. If the contract is itemized it’s easy to see what is included and what isn’t, however, if it’s a lump sum contract then it is up to the contractor to decide if this is part of the original contract and price or if more money will be needed.
Because of all the changes that can arise in a remodel or build, it is beneficial for both the contractor and owner to have an itemized contract. It keeps communication more open and clear as the project goes on, and allows for everything to be properly paid for. This will overall make the owner happier with the project in the end and build a better relationship for all of those involved!
In summary, make sure to request an itemized contract for all construction projects. It will end up saving you a lot of time and headache in the long run. It also makes it easier to compare pricing and quotes between contractors when you are in the bidding process.