Contractor License Practice Exam

What is the name of the construction estimating method that involves a fixed price for the entire project?

1. Time and material method

2. Lump sum method

3. Unit price method

4. Cost-plus method

The correct answer is: Lump sum method

The lump sum method is a construction estimating approach where a contractor agrees to complete the entire project for a fixed price. This price usually encompasses all costs related to labor, materials, equipment, overhead, and profit. The advantage of this method is that it provides both the contractor and the client with a clear and definitive cost expectation upfront, which can aid in budget management and financial planning. In addition, the lump sum method helps to simplify project management for the contractor, as all parties are aware of the total cost from the beginning. It incentivizes the contractor to complete the job efficiently and within budget, since any unforeseen costs incurred must be absorbed by them unless provisions for changes are included in the contract. In contrast to other methods: the time and material method involves billing based on the actual time worked and materials used, which does not provide a fixed overall cost; the unit price method calculates costs based on specific units of work, leading to variable total costs; and the cost-plus method reimburses the contractor for costs incurred plus an additional fee for profit, which can also lead to fluctuating total expenses. Thus, the lump sum method offers a straightforward approach by establishing a single total price for the project's completion.