A civil construction contract is a legally-binding document that serves as an agreement between both the builder and the owner. Essentially, the contract serves as either an oral or written agreement as to the timeline of the construction, the payment to be made, and other terms and conditions that are agreed upon by all parties involved. By having a contract in place, it provides assurances to all parties that everyone is on the same page regarding expectations, while also offering clarity as to how to best address issues that may arise affecting the terms and conditions of the contract. For example, inclement weather may impact the deadline as to when the builder is able to complete certain milestones.

Types of Construction Contracts

As with most types of business, there are a variety of contracts that may be used in the world of construction. Generally, how the disbursements are made ends up determining the type of contract that is to be used. The different types of construction contracts include:

  • Lump sum or fixed price contracts. As the name implies, this type of construction contract provides a fixed price for all of the activities related to the construction that is taking place.
  • Cost Plus Contracts. With this type of construction contract, it is expected that the builder will be paid for any materials or equipment purchased, rented, leased, or any other costs associated with them fulfilling their end of the contract.
  • Time and Material Contracts. If the overall scope of the construction project is not being well-defined, or is otherwise unclear, a time and material contract will often be used.
  • Unit pricing contracts. This type of contract is often used by government entities, in addition to builders.
  • Measurement contracts. These types of contracts are also referred to as either, “re-measurement contracts”, or, “measure and value contracts”, and are typically used in circumstances under which the final or overall cost of the project cannot be defined in advance, but the scope of the project (such as size, design, etc.) can be.
  • Turnkey contract. This type of contract states that the project will be delivered in its final, completed state, rather than in segments or by meeting certain milestones.
  • Design and procurement build. Working on an agreed-upon lump sum price, this type of contract assumes that the builder is to be responsible for both the design and the construction of the project.
  • Item rate contract. This type of project essentially breaks the pricing down into various parts or milestones.
  • Percentage rate contract. With this type of the contract, the client (or, owner) is responsible for providing pricing and a breakdown of quantities, etc., along with the timeline for various milestones.
  • Labor contract. Much as the name implies, the type of contract requires the builder to provide a quote or cost estimate to the client that is specific to the labor or, “man power” involved, and does not include the cost of materials or equipment.
  • Piece work agreement. This type of construction contract applies to circumstances in which there is not a specific timeframe or size agreed upon, but simply a price to be paid.
  • Target contract. A target contract is used when the builder is being paid for the cost of the project, along with a percentage of those costs.

More on Lump Sum Contracts

As lump sum or fixed price contracts are quite common, there is more to know and consider, if entering into this type of construction contract. Generally, this is the preferred type of contract to be used when the scope of the project and various timelines are clearly defined and agreed upon by all parties involved. For example, the contract may provide incentives for certain details such as early completion of the project or for the completion of certain milestones.

Just as a lump sum contract can provide certain incentives, it may also include penalties for times in which certain tasks are not completed by the agreed upon target date. These penalties may include payment being held until such time as the task is completed, or a certain amount or percentage being deducted from the overall payment.

It is worth noting that with a lump sum contract, the builder will need to know upon determining their pricing structure, any additional costs that may be associated with their ability to complete the project, such as rentals, purchasing materials, etc., as those costs will need to be included in the overall bid made to the client in the terms and conditions.

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