Construction contracts are essential in a construction industry, they pretty much determine how much you are paid for the project and also how much you are liable to pay and many other important elements. Construction contract types contain different aspects of construction projects that need much scrutiny before execution.
So, without further ado, let’s get into the different construction contracts and how each construction contract types affect construction projects.
4 Different Types of Construction Contracts
To further help with the distinction, we have listed the differences in each of the four types of contracts and when to use each type of building contract.
1. Lump Sum Contract
This specific contract of the four types of contracts predetermines one set price for all work done in the project. Such a contract is also called a “stipulated sum” contract or a “fixed price” contract. Within such building contracts, you might wonder if there are separate clauses that mention incentives. Well, not quite. These building contracting include incentives within the contract price to reward the builder for a job well done. The one risk associated with such forms of a construction contract is that if the project goes out of scope, the owner isn’t obligated to pay any more than the amount mentioned.
So, it is advised the owner signs the contract at his own risk. However, it is worth mentioning that such forms of construction contracts might contain clauses that include additional allowances in unforeseen events such as the one mentioned above. Such building construction contract are advised to be signed only for projects with a definitive timeline and scope.
2. Unit Price Contract
These building construction contracts usually emphasize the particular tasks that are to be carried out and the materials utilized on those tasks. Such divisions in tasks allow builders to be more precise with charging a certain price for each specific task carried out or to be carried out, dependent on the category. Construction unit prices vary given the severity and intensity of task, also the time needed to complete given tasks.
It is worthy of noting that such construction project contracts are usually used for small construction jobs and not large projects. The reason for there being construction unit prices is precisely that. Unit price construction contracts are usually used for repetitive work, which involves a plethora of different tasks. So, such unit price construction contracts are mostly signed if there are any aforementioned specific tasks.
3. Cost-Plus Contract
This type of construction project contract requires the owner to pay for all the project’s expenses. It also includes an already agreed amount that is spent on builders and their overhead expenses. There are different types of cost-plus contracts;
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Cost-Plus Fixed Percentage
In this contract, the payment includes both the builder’s profit and overhead costs and the associated project costs. The builder’s profit and overhead are dependent on a fixed percentage of the total project cost.
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Cost Plus Fixed Fee
Similar to the contract mentioned above except the builder’s profit and overhead part. In the cost-plus fixed percentage contract, the builder’s profit and overhead are calculated as a percentage of the total project cost, but in this type of construction contract, the builder’s profit and overhead is a fixed amount that is preconceived and decided upon whilst constructing the contract.
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Cost Plus with a Guaranteed Maximum Price (GMP) Contract
The expenses or payments include the associated project costs and fixed fee that is paid up to the maximum cost. If the guaranteed maximum price is not reached in this method, then the difference between the GMP and total cost will not be paid. This, in turn, helps the owner save more money. Such building construction contracts are usually signed when there is no definitive scope of work, materials, labour and construction equipment. Such projects are usually completed as “envisioned” since there are no budgetary restraints on the builders.
4. Time and Materials Contract
This is similar to wages, in this contract, builders are usually paid out hourly or daily. In addition to paying out such wages, the owners are also responsible for paying any additional project costs such as direct, indirect, makeup or overhead costs. Such contracts are usually signed, again, when the scope of work is unclear, and it carries less risk when used for small projects. Price and project duration caps are also a common feature of such contracts.