Assessing the impact of using lumpsum contracts on the profitability of construction projects in Kampala.

Abstract

The construction industry is one of the most significant industries that contribute towards socio-economic growth worldwide especially to the developing countries (Hussin et al, 2013). It contributes 5-10% of gross domestic product in all countries,employs approximately 10% of the working population and is responsible for about half of the gross fixed capital formation (Ofori, 2012). The need of a well-functioning construction industry is therefore of great importance since all human beings in modern societies are directly affected by its processes and outcomes(Ogunsami, 2013). The execution of construction projects is majorly governed by two parties within the construction industry, that is, the employer and the construction contractor.A fundamental part of the project preparation stage is the kind of basis on which obligations of the employer and contractor are defined,technically termed as a construction contract(Cunningham, 2015).Construction contracts based on the mode of payment include cost re-imbursement contracts where a contractor is paid basing on the expenditure in executing works and lumpsum contracts where a contractor is paid basing on the initial predetermined estimates regardless of the actual expenditure(Murdoch & Hughes, 2000). The underlying principle of construction contracts is that risk is reasonably apportioned between the parties to the contract considering their respective strengths and weaknesses in relation to the contract conditions (Surahyo, 2018). Every project is started with the stake holders working toward a successful and profitable project (Vaux, 2014). However, this is to the contrary for most construction projects undertaken with the lumpsum type of contract within the industry where almost all risk is transferred to the contractors(Ferguson & Ferguson, 2010).A lumpsum contract requires a contractor to provide a fixed price to the employer to do all the work required by the agreement(Kaplanogu, 2009).Despite the fact that this type of contract is quite prestigious to employers, it poses a number of challenges for the construction contractors. Many of the projects executed under the lumpsum contract arrangements turn out unprofitable due to the burden of risk a contractor undertakes in terms of acceptance of liability for any eventualities (Viator, 2019). The difficulties in attaining desired profitability when using the lumpsum type of contract increase in cases of public projects since maintaining of original plans is exceptionally difficult in such circumstances that involve many political pressures (Changet al, 2018.