Construction Contracts From A to Z

Standardized Legal Documents Construction Contracts From A to Z

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.

 If you want to learn how to write legal documents yourself, DoNotPay can help you.

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:

  1. Unit price contracts
  2. Lump sum contracts
  3. Time and materials contracts
  4. Guaranteed maximum price contracts
  5. 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:

AdvantagesDisadvantages
  • The price for each work unit is determined beforehand
  • The information is transparent to both parties
  • Units may be added
  • The price of the project as a whole is difficult to foresee
  • Payments can be delayed if unpredictable units arise 

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:

AdvantagesDisadvantages
  • Saving money if the project sticks to the budget
  • Making the bidding process easy as there are no multiple units
  • Profit margin suffers in case of unpredictable costs
  • Less room for error than with unit price contracts

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:

AdvantagesDisadvantages
  • Reimbursement for unexpected costs
  • Negotiation aspects of the contract are simple for both parties
  • Requires additional time for tracking the period and materials the process requires
  • Can result in owners spending more money on the project than they planned to

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:

AdvantagesDisadvantages
  • Provides an incentive for contractors to finish the work on time without incurring additional costs
  • Motivates the owner to share the savings with the contractors
  • The builder has to cover the costs of any unpredictable time or materials issues 
  • The bidding process is long as the contractors usually want to increase the amount of guaranteed maximum price

Cost-Plus Contracts

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:

  • Labor 
  • 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:

AdvantagesDisadvantages
  • Flexibility during the project
  • The builder earns an agreed-upon profit amount 
  • Unforeseen expenses aren’t seen as devastating errors 
  • The owner has a lot to lose if there are many unpredicted costs, and they can’t finance the rest of the project
  • The builder may find it challenging to justify all the costs

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