Utah General Contractors - Business and Law Practice Exam

What type of contract provides the owner with a set total price in advance?

1. Lump sum

2. Cost-plus

3. Time and materials

4. Unit price

The correct answer is: Lump sum

A lump sum contract is a type of agreement in which the contractor agrees to complete the project for a fixed total price. This contract type gives the owner a clear understanding of the financial commitment required for the project from the outset. The all-inclusive price is determined during the bidding process and helps manage the budget effectively, as it does not fluctuate with the actual costs incurred during construction. In contrast, cost-plus contracts involve reimbursing the contractor for their actual costs plus an additional fee, which can create uncertainty regarding the total project cost. Time and materials contracts bill the owner for the actual time worked and materials used, leading to variable costs that can exceed initial estimates. Unit price contracts establish costs based on predetermined unit rates, which may also lead to fluctuations in total project costs based on the quantities used. Therefore, a lump sum contract is distinct in its provision of a set total price in advance, offering clarity and financial predictability for the owner.