There are 3 basic types of construction contracts. Following, we are going to take our time to explain each one of these contracts. So, take the time to read them!
Basic Construction Contracts
Lump-Sum or Fixed Price
Such a contract evolves around fa fixed price for every construction-related activity. Lump-Sum contracts cover incentives as well as benefits of early termination including the penalties dubbed liquidated damage (thanks to late termination). Lump-sum contracts are preferred with a clear scope and with a defined schedule which is reviewed and agreed upon.
The contract is used when the risk is transferred to the builder and the owner wants to avoid the change order for any reason. The contractor needs to include a percentage cost related to carrying the risk. Such costs are hidden at a fixed price. In the case this is a lump sum contract, it’s hard to obtain credit back for work not completed, so consider when evaluating your options.
Cost Plus Contracts
Such contracts include payment covering actual costs, purchases and other expenses related to construction. Cost pus contracts contain specific information related to pre-negotiated amount, contract overhead and profit. Costs need to be detailed and have to be classified as direct or indirect costs. There are several variations of Cost Plus Contracts and some common examples are:
- Cost Plus Fixed Fee
- Cost Plus with Guaranteed Maximum Price and Bonus Contract
- Cost Plus Fixed Percentage
- Cost Plus with Guaranteed Maximum Price Contract
These contracts are used when the scope isn’t clearly defined and it is the owner’s responsibility to establish a few limits about how much the contract is going to bill. With these aforementioned options are used, these incentives protect the owner’s internet and won’t get changed for unnecessary changes.
Time and Materials Contract when Scope Isn’t Clear
Time and Material contracts, these are preferred if the project scope isn’t clear or has been defined. The owner and contract have to establish agreed hourly or daily rate. This also includes additional expenses that can arise in the construction process.
Costs have to be classified as direct, indirect, markup and overhead and they better be included in the contract. In some cases, the owner may want to establish a cap a specific project duration to contract which must be met. In order to have the owner’s risk minimized. Such contracts are useful for small scopes when you can make a realistic guess on how long it will take to complete the scope.