Types of Construction Contracts: Everything You Need to Know
Many types of construction contracts are available to meet the needs and purposes of different construction projects. 3 min read
Many types of construction contracts are available to meet the needs and purposes of different construction projects. Construction projects can vary in many ways, from the type of construction work to be done to the way the payment will be made. Choosing the right kind of construction contract will ensure that both owner and builder will have all their concerns addressed and expectations specified. It will help prevent misunderstandings and keep the project running smoothly.
Types of Construction Contract
A construction contract refers to a legally-binding agreement between the owner and the builder that specifies the amount of compensation that will be paid for the completion of a project and the method by which payment will be made. There are several different kinds of construction contracts being used in the industry, some of which are more preferred than others. The main types of contracts can come in many different forms and be customized to suit the needs of different products or projects. Generally, construction contract types are defined by:
- The way compensation will be made
- Duration of the project
- Quality expectations
- Project specifications
- Other concerns
Lump Sum Contract
Also referred to as a stipulate sum contract, a lump sum contract is the most basic type of agreement between a construction contractor and a client. This contract requires the builder to agree to provide specified construction services at a fixed price. The contractor is responsible for completing the project properly and providing its own methods and means to get the job done. A higher markup can be requested in case of unforeseen circumstances.
Unit Price Contract
A unit price contract is another type of construction contract that is widely used by construction contractors and federal agencies. In this kind of contract, the construction work is broken into different parts, usually according to the construction trade. A unit price contract ensures that the owner will not be paying inflated prices for the construction products or services that are being acquired.
Cost Plus Contract
A cost plus contract refers to a contract that requires the customer to pay all the material and labor costs to be incurred in a construction project, as well as the contractor's overhead and profit. This type of contract is a preferred option when the client is highly uncertain about the scope of work, labor, materials, and equipment required for the project. It usually requires more monitoring and supervision. In a cost plus contract, the builder will get a fixed amount of profit.
In an incentive contract, compensation is paid according to contracting performance, which is determined based on a specific target, such as schedule, quality, or budget. There are two types of incentive contracts: a fixed price incentive contract and a cost reimbursement incentive contract. A fixed price incentive contract is preferred when performance requirements and costs are reasonably certain. A cost reimbursement incentive contract, on the other hand, allows the negotiated fee to be changed later according to a formula that is based on the relationship between allowable costs and target costs.
Guaranteed Maximum Price Contract
Also called not-to-exceed price contract, a guaranteed maximum price contract refers to a cost-type contract in which the contractor will receive compensation for the actual costs incurred, as well as a fixed fee with a ceiling. The builder is required to take responsibility for cost overruns unless the guaranteed maximum price contract is increased through a formal change order. Savings that result from cost underruns will go to the owner.
If the delivery method in a construction project is design-build, a design-build contract is an appropriate option. In this type of contract, the customer awards the whole construction project to a single contractor. The contractor is required to perform all the design and construction work needed to complete the project.
Integrated Project Delivery Contract
An integrated project delivery contract is a unique type of contract that requires the participation of owners, contractors, designers, and key stakeholders at an early stage of a project. The parties that sign an integrated project delivery contract share both risks and rewards, leading to greater integration of processes, expertise, resources and optimal efficiency through all phases of the project.
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