1. Introduction to Residential Construction Contracts
2. Lump Sum or Fixed Price Contract Type
3. Cost Plus Contracts

Residential construction contracts are used when a homeowner hires a contractor to work on their home so that both parties will be legally protected. 

Introduction to Residential Construction Contracts

Residential construction contracts provide invaluable legal protections to both contractors and homeowners.

Several issues will be covered by your residential construction contract, including:

  • The services your contractor will provide.
  • The compensation your contractor will receive.
  • The schedule of your project, including length of construction.

Having a construction contract in place ensures that constructions will be completed in the way the homeowner wishes and that the contractor will be fairly compensated. Construction contracts are available in several forms, but most professionals prefer a certain contract type. There are several variations between types of contracts, and you can also write a customized contract that fits the exact needs of your project.

Before either party signs a construction contract, they should review it fully to make sure that the terms are acceptable. Homeowners also have the right to negotiate the terms of a contract before signing. A residential construction contract can also help to prevent disagreement between homeowners and contractors, which is crucial in having a project completed on time. Generally, when you meet with your contractor, they will present you with a residential construction contract that's ready to be signed.

You could also have an attorney write a contract or draft one yourself. Construction contracts can either be very simple, covering only basic terms, or extremely complicated. To make sure your rights as a homeowner are protected, you should insist on a contract that has simple, understandable language and covers all necessary terms. 

Lump Sum or Fixed Price Contract Type

One of the most common types of construction contract is a lump sum contract, which is also known as a fixed price contract. With this type of contract, construction activities will have a fixed price that you will need to pay. These contracts will frequently include incentives for the contractor if they complete the project ahead of schedule, but may have penalties if the project isn't completed in the timeframe outlined by the contract.

Lump sum contracts make for a good choice when the scope of your project is clearly defined, including the constructions schedule, and both parties understand and agree to these terms. You would commonly use a lump sum contract when you want to avoid excess charges and shift risk to the contractor. Getting back money for uncompleted work can be difficult with this type of contract, which is something that you need to consider. 

Cost Plus Contracts

Cost Plus Contracts are another type of construction contract. This contract differs from lump sum contracts in that they include fees for coordinating and managing your project in addition to construction costs. Usually, the fee for coordination and management will be calculated based on the building cost percentage. These contracts will typically include information related to overhead costs and contractor profits. In the contract, both indirect and direct costs should be clearly defined.

Variations of the Cost Plus contract include:

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

When the project scope is not defined and the homeowner wants to put restrictions on what the contractor can charge, a cost plus contract will be used. The incentives frequently used in these contracts are a good way to limit excessive charges while protecting the interests of the homeowner. If you choose a cost plus contract, you should be prepared to more fully supervise your project. It's also important to remember your contractor will be less at risk with this type of construction contract. The cost plus contract is an extremely popular contract option and has increasingly grown in popularity over the last 12 years.

When you're preparing to hire a contractor for your construction project, you should consider the different types of contracts you can choose and how each individual contract can influence the length of your project. Typically, you will not actually meet your contractor until the bidding process has come to an end. However, if you choose a cost plus contract, your contractor will come onto your project in the very early stages, usually during the design process. No matter your contractor's skill level, you should expect a percentage of 15 percent.

If you need help understanding residential construction contracts, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.