Types of Construction Management Contracts
There are several types of construction management contracts including agreements that protect both the purchaser and the builder.3 min read
There are several types of construction management contracts. Such agreements protect both parties –the purchaser and the builder – for any unforeseen circumstances that could arise during the construction project.
The contract itself generally specifies the type of work to be completed, along with the price to be paid to the builder.
Construction Contracts: Types
There are several types of construction contracts, and it is important that you are aware of the purpose of each type. These contracts include:
- Unit pricing contract
- Lump sum or fixed price contract
- Time and material contract
- Cost plus contract
- Guaranteed maximum price contract
- Cost-reimbursable alternative contract
- Integrated project delivery
Unit Pricing Contract
Builders and federal agencies generally use a unit pricing contract. This specific contract provides a written bid for projects in which the scope of work is not entirely known. For example, if the number of materials, degree of labor, rate per unit, or other factors are unknown at the time of execution, then this type of contract would be drafted.
Lump Sum or Fixed Price Contract
This type of contract will identify either a lump sum or fixed price; these types of contracts are the most common, particularly when the work is clear and there are no issues known to either party at the time the contract was entered into.
Particularly, lump sum contracts are used when the scope of work and schedule is agreed upon by both parties.
This type of contract transfers the risk to the builder. The purpose of drafting the lump sum contract is to also ensure that the buyer avoids increasing costs that the builder might have not otherwise specified when the parties verbally agreed upon the price and work to be done.
However, these types of contracts can also have penalties, i.e., liquidated damages, for delayed completion of the work. With that said, early completion of the work could provide additional incentives for the builder.
Time and Material Contract
The time and material contract is another contract used when the scope of the work is not quite clear to the builder and purchaser. Therefore, the contract provides an agreed upon hourly rate (or daily rate) for the builder. Other expenses could be included in the contract, including materials, additional labor, etc.
However, in this type of contract, it is important to set a limit on the duration of the project to avoid potential issues down the line.
Cost Plus Contract
This type of contract is used if the construction work to be done involves variable costs, unknown additional expenses, etc.
Therefore, this contract will need to identify the builder’s overhead costs as well as the profit to be made from completing the work.
The profit is agreed upon prior to entering into the contract; however, the buyer agrees that additional costs could be incurred for other materials and work that might need to be done.
While this can be a good contract to have as it protects the buyer, it can also be risky for the buyer as he or she will need to have more oversight over the builder’s work to ensure that the builder isn’t charging additional frivolous costs that might not otherwise be necessary to complete the job.
Guaranteed Maximum Price Contract
This is a cost-type contract and specifies that the builder is paid for the actual costs that are incurred, in addition to a fee, which is subject to a ceiling price. Therefore, any additional costs are paid for by the builder. However, if the buyer pays the builder additional costs that the builder doesn’t actually incur, then those fees are returned to the buyer.
Cost-Reimbursable Alternative Contract
In this type of contract, builders are paid for their work with fixed costs, as well as reimbursable and incentive costs. This type of contract is best for those projects in which the number of materials or execution of the work is unclear.
Integrated Project Delivery
This type of contract is also referred to as an alliance contract and involves several parties, including the owner of the property, designers, builders, and other stakeholders. Therefore, this type of contract allows for greater transparency among all parties involved. The overall risk and reward are also shared among all parties, as they are all aware of the timeline and process of the construction project taking place.
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