The Advantages of a Lump Sum Construction Contract

desperation - No acceptance here image by Yanir Taflev from Fotolia.com

There are several types of contracts used in home building. The most-used building contract is known as a "lump sum" contract. This type of contract totals up all costs to produce the home, including the builder profit, overhead and any extras that the homeowner specifies. When the entire agreement is completed and signed, the builder is responsible for producing the home within that guaranteed cost. There are some advantages to using this type of contract.

Security

The first advantage to using a "lump sum" building contract is the security to the new homeowners. They are assured of the cost to build since the builder has guaranteed that cost to them in writing. They do not have to worry about paying more money out of pocket due to rising costs of materials during the construction of their home. If some unforeseen issue arises during construction where there are added costs, the builder must cover it from his own funds since he made the guarantee of costs to his client.

Builder Experience

Another advantage to using a "lump sum" contract is the experience of the builder. He must be sure of his costs and time frame in order to make such a guarantee to his client. This type of knowledge can only come from a history of learning what does not work. He must be a good manager of work flow, and the subcontractors that he works with must be efficient and reliable.

Lender Acceptance

A really big advantage to using a "lump sum" building contract is that this is about the only contract mortgage companies will accept. The "cost plus" (cost of materials and labor plus a percentage for builder profit) contract is not normally accepted by construction banks.

References

About the Author

Joey Campbell spent eight years in real estates sales and property management. She has been active in residential and commercial mortgage for the past 23 years in the Southeastern U.S. Campbell has attended hundreds of seminars, and has written and conducted workshops on subjects such as credit, debt excelleration and prequalifying for residential mortgages.

Photo Credits

  • desperation - No acceptance here image by Yanir Taflev from Fotolia.com