Construction Contract Types Explained

Construction Contracts
Construction Contracts

Construction Contract Types

A construction contract is a legal agreement between the client and the contractor which involves basic information for the task to be performed by the contractor. In construction industry this legal agreemeent which includes the scope, bill of quantity, drawings, schedule and other documents, is established between the owner and the builder. Many different types of contracts can be used to define specific terms and requirements  for a construction project. However there are 4 common types of construction contracts widely used by construction and contract managers. Construction contract types typically define the scope, duration, technical requirements, quality, specifications, payment method and other important requirements. In this article we will discuss construction contract types and their key aspects from a construction law point of view.



Common Types of Construction Contracts

Whether you are build a huge structure or restore an existing facility, a construction project usually involve significant amounts of money transfer between the parties. Depending on the magnitude and complexity of a project significant disputes may arise from various expectations of the parties involved. Construction law aims to resolve the disputes between both contractor and client as they enter into agreements to build a construction.

Whether you are involved in a construction project as a contractor or a client, you must be aware of all of your rights under law in which location you are working. For example let’s say that you are builder working in Louisiana, you must understand all of your rights under Louisiana construction law. Before to sign a contract, you must be sure that your rights are protected and the terms are fair for you.

As stated in the first paragraph , there are several types of construction contracts used in the construction industry. Generally the type of contract depends on the payment method. In other words, contract type is based on on how the disbursement will be made.

Below are the four common types of construction contracts.



1. Lump Sum or Fixed Price Contracts
2. Cost Plus Contracts
3. Time and Material Contracts
4. Unit Price Contracts

Lump Sum or Fixed Price Construction Contract Type

In Lump Sum or Fixed Price Contract type, there is a fixed price that will be paid to the contractor for all the scope of work. Contractor commits to complete the work with this fixed price and the client commits to pay this fixed price to the contractor for the completion of work.

Lump sum contracts may include benefits for early delivery of work and sometimes planned costs may be lower than actual costs.

In this contract type, the contractor takes on more risks such as late delivery of work, increased material costs, cost of unclear scope and other potential problems.

Cost Plus Construction Contract Type



Cost Plus Contracts include the actual cost which is attributable to the scope of work and a certain amount of profit. Mostly this certain amount of profit can be a percentage of total costs or direct costs.
The most common types of Cost Plus Contracts are below

• Cost Plus Fixed Fee
• Cost Plus Fixed Percentage
• Cost Plus with Guaranteed Maximum Price Contract
• Cost Plus with Guaranteed Maximum Price and Bonus 

Cost plus contracts are widely used when the scope has not been described clearly or when the work needs some special technical features. In this contract type usually client takes on more risks than contractor because if the profit rate is a percentage of total costs, it increases as the total costs increase. Therefore Cost Plus Contract type requires more supervision and tracking.

Time and Material Construction Contract Type



In this type of contract, the client pays an agreed hourly or daily rate for manpower of the contractor and his subcontractors plus the actual costs spent for construction materials. Time and material contract type can be prefered when the project scope is unclear or small.
In this contract type the client takes on more risks because if the duration of the project increases, the project costs increase. In order to minimize the risks the client may indicate a specific project duration in the contract.

Unit Price Construction Contract Type

In this type of contract, every task has a specific price. The client pays the price for the quantitiy of work the contractor performes. Both the clients and contractors have little risk in this type of contracts. If the unit prices are reasonable, both parties can easily control their costs considering the quantitiy of work performed. The client can easily verify how much he is being charged and the contractor doesn’t have to worry about wrong estimation for certain activities.

Summary



Construction contracts involve a significant amount of money transfer and risks. Therefore, before to sign a contract, make sure that make sure that the contract type is suitable for the situation and terms of agreement is fair for your. Working with experienced law firms in all types of construction contracts helps you to project your rights under construction law.

In this article, we analyzed 4 common types of construction contracts which are Lump Sum or Fixed Price Contracts, Cost Plus Contracts, Time and Material Contracts and Unit Price Contracts. The type of contract depends on the scope and how the payment will be made. In order to avoid losses, scope of work should be defined clearly and contracts should have enough supporting documents. Note that standard contract forms always expedite dispute resolution.

External References

Associated General Contractors

See Also

Tips for Construction Claims Management

Preventing Claims and Construction Claim Management

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