LUMP SUM Construction Contract

By – Lic. Mauricio Tortolero.

The lump sum construction contract, or for fixed price (the “Contract”), is a contract in which a person called “contractor” agrees to execute, under its direction and supervision, and with its own materials, a construction commissioned by another person called “owner“, who in exchange agrees to pay the contractor a fixed price which is determined at the time that the Contract is executed.

The Contract: (i) generates obligations to the contractor and to the owner, (ii) includes benefits and obligations to the parties that participate in the same, (iii) establishes the normal economic result as of its execution allowing the parties to immediately determine if it will produce a profit or a loss, (iv) is carried out over a period of time during which the contractor and the owner perform their obligations, and (v) prohibits the contractor from entrusting to another party the execution of the construction unless there is express agreement to the contrary with the owner.

The most important elements of the Contract are that it must be possible to physically and legally carry out the construction and that the price be fixed and agreed by the parties, usually through the payment of money, or in another way such as the transfer of ownership in favor of the contractor of part of the construction that is being carried out.

The principal obligations of the contractor in the Contract are:

  1. To execute the construction personally.
  2. To perform the construction entirely or in parts, and
  3. To guarantee the construction against construction or workmanship defects, or against the poor quality of the materials used during construction or defects.

The principal obligations of the owner in the Contract are:

  1. To receive the construction, and
  2. To pay the price to the contractor.

In addition to what is agreed by the parties in the Contract, the Civil Code establishes that the Contract will end in the event of:

  • Death of the contractor.
  • Rescission of the Contract by one of the parties in the same, and
  • The decision to stop performing the construction.

The usual terms and conditions included in the Contract are:

  • The determination of the construction work that will be carried out by the contractor through the attachment to the Contract of the specifications, plans, drawings, characteristics of the materials, construction program, payment schedule, and other documents that are required for such purpose.
  • The declaration by the contractor that it has sufficient resources to carry out the construction, such as personnel and equipment, as well that it has the employee/employer registries with the Treasury Department, Social Security Institute and the Federal Housing Institute for Employees.
  • The acknowledgment that the contractor knows the site where the construction will take place and that it has carried out an inspection in order to ensure that the construction entrusted by the owner may be carried out.
  • The term for the execution of the construction, the penalties for non-compliance, and the prizes to be awarded in favor of the contractor in the event of early termination.
  • The form of the payment of the price, the inspections to be carried out by the owner, and the total or partial acceptance of the work carried out by the contractor.
  • The modifications of the constructions to be carried out through the execution of change orders.
  • The events in which the construction work can be suspended or terminated early.
  • The insurance policies (civil liability) and bond policies (advance payment, fulfillment of obligations, and guarantee) to be delivered by the contractor, as well as the reserve fund that will be formed with the percentage of payments that the owner will periodically make to the contractor in order to serve as an additional guarantee to the owner in the event that the contractor fails to comply with its obligations.
  • The responsibility for obtaining the permits and licenses that are required for the performance of the construction and the compliance with the legal provisions, and
  • Breach by the contractor and the causes of termination of the Contract.

In the event that you would like to receive further information relating to lump sum construction contracts, please contact one of the following attorneys:

Leobardo Tenorio-Malof   |
Héctor Torres-López   |
Alejandro Pedrín   |
Mauricio Tortolero   |
Daniel Gancz-Kahan   |
Alejandro Ceballos   |


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