In engineering projects, service contracts or labor contracts, we often hear about two systems: "lump sum" and "gratuity". They are all about the method of payment and calculation of fees, but there are significant differences in terms of operation and principle. Next, we will delve into the differences between the two systems.
1.Differences in definition.
The lump sum system is a fixed-price contract, that is, the total price of the project or service is fixed and does not change due to the increase or decrease of the quantity of work. The gratuity system, on the other hand, calculates the cost based on the amount of work or services actually completed, and usually has a base cost and a variable cost related to the amount of work or service.
2.The difference between risk-taking.
Under a lump sum system, the contractor or service provider bears the risk of changes in the volume of work or services because the fee they receive is fixed. Under the remuneration system, this risk is passed on to the principal, who is required to pay according to the amount of work or services actually performed.
3.The difference in incentive effect.
Lump sum systems can reduce the efficiency of contractors or service providers because they only receive a fixed fee regardless of the amount of work. Conversely, the honorarium system provides a stronger incentive because the contractor or service provider can increase revenue by improving work efficiency or service quality.
4.Differences in the scope of application.
The lump sum system is usually suitable for projects with relatively certain engineering quantities or service quantities and small changes. The remuneration system is more suitable for projects where the amount of work or service is difficult to determine and changes greatly.
Summary: There are obvious differences between the lump sum system and the remuneration system in terms of definition, risk taking, incentive effect and scope of application. The choice of which system to use should be considered comprehensively based on the specific circumstances and needs of the project.