North Carolina Building Contractor License Practice Exam

In the context of construction, what does a "lump sum" contract refer to?

1. A fixed total price

2. A payment based on expenses

3. Payment for hourly work

4. A cost-plus contract

The correct answer is: A fixed total price

A "lump sum" contract refers to a fixed total price agreed upon by the contractor and the client for completing a specific project. This type of contract provides clarity and certainty for both parties, as it establishes a set amount that the client will pay for the entirety of the work described in the contract. Since it is a predetermined sum, the contractor assumes the risk of additional costs that might arise during construction; any expenses beyond the agreed amount do not increase the contract price unless specifically arranged. This arrangement contrasts with other payment methods such as cost-plus contracts, where the contractor is reimbursed for actual costs incurred plus a fee, or time/material contracts that pay based on hours worked or materials provided. In a lump sum scenario, the contractor's incentive is to complete the project efficiently and within budget, as the predetermined price does not change regardless of the work's extent. Therefore, this structure fosters a strong incentive for budget management and project efficiency while offering the client a clear financial commitment from the outset.