If you're ready to build your dream house, a lump-sum contract is a simple way to pay for it. You tell the builder what you want him to build, he quotes you a price, and you either accept it or look for another contractor. There are other alternatives, such as cost-plus building -- you pay whatever construction costs, plus an added fee -- but lump-sum contracting is a standard approach.
With a lump-sum contract, you know what you're getting and how much it's going to cost. Your price stays the same even if the builder underestimates things: If the hardwood for your floors or the mason laying the bricks cost more than he thought, that's his problem. It simplifies financing, as you know exactly what amount you need from your lender. Lump-sum contracting also makes paying the builder simpler -- the more of the house he finishes, the more you pay out.
The Contractor's View
Even though your builder assumes the risk of underestimating the costs, lump-sum contracting offers her advantages too. If she prices the job accurately, she can be confident how much profit she's going to make on the job. If she manages to do the job for less, she makes even more. Lump-sum projects also require less accounting and reporting on the details of the job than a cost-plus project. That frees the builder and her office staff from a lot of paperwork.
Lump-sum contracts have flaws. If you don't specify the materials the builder has to use, he's free to use cheaper or less durable products. If rising costs really pinch his profits, he may choose cheaper materials and shoddier work than the contract requires and hope you don't catch him. Some builders will walk away rather than continue with an unprofitable project. If you solicit several bids and pick the cheapest, there's a good chance you hired someone who underestimated the real costs.
If all the bids come in higher than you're willing to pay, it may be that you can't build the house that you want for a price you can afford. In that case, you'll have to change the specifications to something less expensive. If you change your mind mid-project about what you want, the builder may refuse, as she based her price on the original specs. The more expensive the change, the more likely you'll have to agree to pay extra to make it happen.
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