Cut From the Same Cloth but Different—Types of Construction Contracts
Are you about to sign a construction contract and start working on a site? Hold on a second!
You should first learn what types of construction contracts are there to get the most out of your deal.
What Is a Typical Construction Contract?
Like any other work agreement, a construction contract is a legally binding document signed by two parties doing business together. The first is the owner of the construction site, and the second is the company providing building resources or the individual workers themselves.
Every construction contract specifies the job requirements of construction workers and their compensation for that work. The American Institute of Architects offers various contract templates for the industry.
Different types of construction contracts outline specific terms of the agreement between the owner and the builder. The most common are:
- Unit price contracts
- Lump sum contracts
- Time and materials contracts
- Guaranteed maximum price contracts
- Cost-plus contracts
Unit Price Contracts
Unit price is a flexible type of construction contract. Rather than viewing an entire venture as a whole, involved parties divide the project into smaller units.
If the job you are about to do will be ongoing and dependent on the materials you’ll use, your best bet is negotiating a unit price contract.
You should tell the owner what the approximate price for each unit is.
If you’re unsure whether you should go with a unit price contract, check out its pros and cons in the table below:
Other terms for unit price contracts are:
- Measurement contracts
- Remeasurement contracts
- Measure and pay contracts
Lump Sum Contracts
Lump sum construction contracts are widespread in the industry. They are also called fixed-price contracts because the compensation is determined for the entire job.
If the work you’ll do isn’t too grandiose, you won’t take many risks by signing a lump sum contract. Let’s see what its benefits and drawbacks are:
Time and Materials Contracts
When the construction project isn’t easily defined, the parties usually opt for a time and materials contract.
The T&M contracts allow builders to be paid for their work hourly, daily, or weekly since no one can accurately predict the exact completion time. They also legally bind the owner to reimburse the contractor for the cost of any materials spent unpredictably.
The nature of the time and materials contract requires the parties to determine:
- The type of costs to be covered
- An agreed hourly, daily, or monthly rate
- The unexpected expenses
Here are the important pros and cons of T&M construction contracts:
Guaranteed Maximum Price Contracts
Guaranteed maximum price contracts are the best option for an owner who can predict the nature of work they are paying for and have done similar projects in the past.
The owner determines the maximum price for compensation, and anything above that price is covered by the contractor.
Here are some significant benefits and drawbacks of a GMP contract:
Cost-plus contracts are the most flexible type of construction agreements. Under the cost-plus contract, the owner is obliged to cover all costs of the project, including:
- Predicted purchases from the builder
- Unforeseen expenses
- Any indirect costs, such as travel or communication expenses
- Profit or markup
Since the owner bears the most risks, cost-plus contracts usually come with a guaranteed maximum price clause. The clause determines the maximum price the owner is willing to pay for the entire project.
If you’re contemplating whether the cost-plus contract is for you, check out its pros and cons:
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