Different Types of Contracts: Everything You Need to Know
A contract is an agreement between two entities or individuals, which serves as legal protection for both parties involved in a potential business deal. 4 min read
Updated July 8, 2020:
A contract is an agreement between two entities or individuals, which serves as legal protection for both parties involved in a potential business deal. There are different types of contracts, and each determines the rights and duties of both sides. A specific type of contract regulates the risks and expenses for the contractor.
Two different kinds of groups of contracts are fixed price contracts and cost-reimbursement contracts. Different types of contracts, which are contained within each of these two types of groups, may be used separately or in combination with one another.
Lump Sum or Fixed Price Contract Type
A lump sum or fixed price contract is the type of contract where all construction-related activities are regulated with a total fixed price agreement.
Lump sum contracts are favored in situations when a clear scope and a defined schedule is negotiated and accepted. For example, if it is necessary to shift the liability to the builder and to prevent changes in orders for undetermined work, this type of contract is best suitable for the situation. Due to present risk, a contractor holds some percentage cost.
It is essential to consider that if the lump sum contract was signed, it would be challenging to obtain any credit back for an uncompleted job.
Cost Plus Contracts
Cost plus contracts cover:
- Actual cost
- Other expenses incurred from the construction work.
Before the negotiations begin, a specific expense amount must be included in cost plus types of contracts. These amounts represent a percentage of the material and labor costs, which cover the continuing costs of operation and the contractor's profit.
Cost can be direct or indirect, and it must include all critical cost aspects of a contract.
Time and Material Contracts When Scope is Not Clear
Time and materials contracts are types of contracts used in a case where:
- The capacity and quantity of time and materials is undetermined, which makes the project risky.
- The owner and the contractor are compatible with the tariff per hour or per day, including possible additional costs during construction.
Periodically, the owner can determine a duration of the project with a contractor, which must be performed to reduce the risk to a minimum.
The downfall of this type of contracts is that the seller can increase an indefinite or unknown expense amount, which is the cost the buyer has to pay.
Unit Pricing Contracts
Unit price contracts are commonly called hourly rate contracts. This type of contract combines:
- Reimbursable expenses
- Fixed price type of contracts.
Unit pricing contracts can be adjusted during the process in which the owner offers certain quantities and prices for the predetermined number of items.
Both parties involved in a bilateral contract promise to implement certain things.
In a unilateral contract, one party, which is the bidder, requires performance from the other party rather than a promise. An offeree cannot be sued for:
- Abandoning the project
- Not being able to finish his or her work.
This is because he or she did not make a promise. Therefore, only the bidder is required by law to comply.
The contract can either be implied in fact or implied in law.
- Implied in fact contract. The joint agreement creates obligations and promised intentions among the parties, where both are not expressed in words. This type of contract is not articulated directly but through facts and circumstances, which demonstrates the shared intention to achieve an agreement.
- Implied in law contract. This is known as a quasi-contract because the contract does not represent a real legal agreement.
A simple contract is any kind of written or oral agreement. The following are not required for a simple contract to be legally binding:
Contract Under Seal
According to the traditional principles, the contract represents a legal act only if stamped. The seal is a certainty that the legal consequences are conceivable.
An unconscionable contract is an unfair type of contract, made only in favor of the party that is superior in the negotiations.
Adhesion contracts are created by an advantageous bargaining party. They allow the weaker side only the possibility to accept the contract or to reject it. It is also known as a "Take it or leave it" type of deal.
Aleatory contracts are based on a mutual agreement of the parties involved, and its effects are activated under the circumstances of uncertain events, while one or both parties accept the risk.
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