Different Types of Construction Contracts – What’s Best

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(Newswire.net — October 25, 2019) — Construction contracts protect both the customer and the builder for a specific remodeling or building job. They are binding agreements between the parties involved designed to protect them both. Construction constructs typically define the fixed terms of the building including quality, materials, specifications and duration. This post outlines the different types of construction contracts. Though there are many types of construction contracts, this article features the most commonly used in both commercial and private builds.

Different Types of Construction Contracts

Knowing the types and structures of contracts helps one to know what to expect from the builder’s approach and what to expect for the project. Though many commercial construction managers may be aware of the different contract types, it helps to have a quick, high-level reference and know the types of contracts that are preferred. As a construction customer, it’s always wise to be prepared for project bids and agreements. 

Unit Pricing Contracts

This type of contract is often used by federal agencies and builders. This type of bid is usually written for projects with an uncertain scope. This means that the rate per unit work volume, the labor, quantity of materials and other factors can be estimated and work can begin before finalizing the specifics.

Generally, unit pricing contracts will have the profit and overhead for the contract included in the rate. When a contractor provides unit prices, the buyer/owner can easily verify the charges and ensure prices are un-inflated. This allows parties to adjust up or down for scope changes, making it easy to make adjustments and keep violations to the minimum.

Lump Sum or Fixed Price Contracts

As the name suggests, these types of contracts have a fixed price for all activities related to the construction. They’re the most common type of construction contracts and are used when prices are decided upfront, usually when there’s a defined schedule and agreed upon scope.

Cost Plus

This type of contract involves payment of actual costs of construction, including direct and indirect costs plus a specific fee. This fee could be a percentage of costs or a fixed fee. Cost plus contracts work in cases where the scope of the work is yet to be confirmed. As such, the owner is responsible for setting limits on how much the contractor bills.

Time and Material

Time and material contracts work well if the scope of the construction project is not clear, or hasn’t been defined. The owner must, therefore, agree with the contractor to establish the rates. This will often include additional expenses that could arise from the construction process. However, all costs must be classified and included in the contract. You can also track your time and material contracts on an app.

Bottom Line

It’s important to note that these contracts can be customized to suit the job. All of the different types of construction contracts ensure parties are protected and the needs of the project are met. Moreover, staying alert to pricing structures helps buyers and construction manager customers feel confident if there are any changes to building construction needs in a project.