What does "lump sum" contract type imply?

A lump sum contract type implies that the contractor agrees to complete the project for a specific total amount of money, regardless of the actual costs incurred during the execution of the work. This arrangement places the financial risk on the contractor, as they must manage the costs of labor, materials, and overhead within the fixed price established in the contract.

If the actual project costs exceed the lump sum amount, the contractor must absorb those additional costs, which incentivizes them to work efficiently and control expenses. Conversely, if the project costs are lower than the lump sum, the contractor benefits from the surplus. This type of contract is commonly used because it provides clarity to both parties regarding the overall project budget, while encouraging the contractor to effectively manage resources.

Options that suggest the contractor is only paid for materials, only charges for labor, or allows for increases in the contract sum do not align with the fixed nature of a lump sum contract.