Building and construction contracts play an important role in the construction industry. Every construction and building project requires a contract, which is a legally binding agreement between both parties, the builder (contractor) and the buyer (owner of property).

The building or construction contract should specify all details regarding the actual work to be done, along with the payment schedule. In addition, the contract should include the timeline for when the work should be completed, the specifications regarding how the work should be completed, and penalties if the work is not done on time, or alternatively, if payment is not made within a certain time period.

Types of Construction Contracts

Not all construction and building contracts are the same; there are different kinds of contracts depending on the scope of work, how large the project is, how long it could take for the work to be complete, and if there are any uncertainties as to the actual scope of work or payment schedule.

For complex building and construction projects, it is beneficial to hire a licensed attorney who can help negotiate on your behalf.

Some of the most common types of construction contracts include the lump sum/fixed price contract, cost plus contract, time/material contracts, unit pricing contracts, and the integrated project delivery contract.

Lump Sum/Fixed Price Contract

These contracts provide for either a lump sum or fixed price payment. The lump sum contract can also include certain financial benefits if a contractor finishes work early. However, the contract might also include penalties, particularly if work is not complete within a specified period of time.

These contracts are generally used when both parties are well aware of the scope of work to be completed, the timeframe in which that work should be finished, and how much is to be paid. In this case, there should be no issues with needing additional materials or construction workers to complete the job.

Cost Plus Contract

The cost plus contract indicates that the buyer is to be charged for the actual costs incurred by the contractor, which include purchases or expenses made throughout the construction project. Therefore, terminology should be included in the contract specifying coverage of the contractor’s overhead costs (expenses) and profit (the payment for actually doing the job).

There are different variations for cost plus contracts, including the following:

  • Cost plus a fixed fee, which is done when the buyer wants to pay the projected costs while also providing the contractor with a fixed fee (profit)
  • Cost plus a maximum price contract, which means that there will be a ceiling on the price paid
  • Cost plus a maximum price and bonus contract, which means that there will be a ceiling on the price paid plus a bonus paid to the contractor for the work done (more of an incentive for the builder)

Time/Material Contract

This type of contract is used if the scope of the work is unclear or hasn’t been clearly defined in the agreement. In this case, a specific time period is agreed upon between the buyer and contractor, i.e. 30 days, so that the contractor is aware of the timeframe in which to complete the work. As such, both parties will identify an hourly or daily rate. That is why it is important to set a deadline for the contractor, so that he or she doesn’t continue working beyond the appropriate timeframe, especially if the contractor is just trying to obtain additional money by dragging out the work.

Unit Processing Contract

A unit processing contract is the most used type of contract in the building and construction project area. The buyer (owner of the property) will choose a unit price before entering into the bidding process. Therefore, if additional units are required after the construction project has begun, this price can be adjusted, making it simpler for the buyer and the contractor to reach an agreement regarding change orders.

Integrated Project Delivery Contract

These contracts are also known as alliance contracts. They are a more modernized contract in which all parties with an interest in the property are involved in the construction process. Therefore, the buyer, contractor, designer, architect, and others will be involved in the planning stage of the construction project.

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