Construction contracts – Types of construction contracts
Before we move on to construction contracts, let us examine what a contract is all about. A contract is a written or spoken agreement between two parties, especially one concerning employment, sales, or tenancy, which is intended to be enforceable by law.
In terms of engineering, construction is the activity of putting together different elements, using a detailed design and plan, to create a structure for a certain purpose in a particular location. When you construct large structures, you need to have a clear plan of how you are going to carry out the task. You also need to know the specific location and its nature.
Therefore, construction Contracts are defined as a formal legally-binding agreement within which the structure, details, and identification of both commitments and parties involved in a construction project are illustrated
Types of construction contracts
There are various kinds of construction contracts used within the industry. The specific type of contract is usually determined by how the disbursement will be made. This will vary from project to project. The specific details of the contract will usually include duration, quality, scope of the work, specifications, and penalties for delays.
More importantly, the contract serves as a legally binding agreement between two parties that they will complete the work and be compensated accordingly. In this article, I will point out the most common types of construction contracts. Below are the common types of construction contract.
- Lump Sum or Fixed Price Contract.
- Cost plus Contracts.
- Time and Material Contracts When Scope is Not Clear.
- Unit Pricing Contracts.
Lump Sum or Fixed Price Contract
This is a type of contract in which a specific total fixed price or amount is agreed upon to be paid by the client (owner of the contract) to the contractor (executor of the project) on completing the project. In this type of contract, the contractor assumes more of the risk since there is specify fixed price for all the construction work. In this type of agreement, the owners agree to pay the fixed price and the contractor agrees to complete the project for the fixed price.
The risks in this agreement rest on the contractor because; there is always a possibility of potential problems and higher prices. In order to protect the contractor, some lump sum contracts contain allowances which designate certain costs to the owner if the contractor goes over budget. Incentives can also be included for contractors if they finish a project early and below budget. Also, there is a penalty if they finish a project late. This type of contract is commonly used when the owner wants to avoid dealing with change orders for unspecified work.
Cost Plus Contracts
This is a type of contract that combines a fixed part (contract) with an unfixed part (cost) to form one deal. In this type of contract, the owner assumes most of the risk. This type of contract is commonly used when the scope of the job is not clearly defined. It is important to note here that this type of contract will require more supervision and tracking.
There are many variations in cost plus contracts. They include; cost plus fixed percentage, cost plus fixed fee, cost plus with guaranteed maximum price contract, and cost plus with guaranteed maximum price and bonus contract. These variations can help to protect and lower risk for the owner.
Unit Price Contracts
This is a type of a contract that gives price per unit task. Unit price contracts involve the contractor determining a specific price for a certain task after which, the owner must agree to pay that price for the number of units the contractor provides. In this type of contract, both parties assume little risk likewise there are benefits for both the owner and the contractor in a unit price contract. Owners benefit because they can easily verify that they are being charged reasonable rates and contractors benefit because they don’t have to worry about inaccurate estimation for certain tasks. This type of contract is commonly used on repetitive or public works projects.
Time and Material Contracts
This is a type of contract that deals with a rate of payment for time and material used. In this type of contract, the owner assumes more of the risk. Time and Material contracts involve the owner paying for the time and materials spent on a particular project. This usually involves the owner and contractor agreeing upon pay rates and any expenses that might possibly come up over the course of a project. The owner assumes more of a risk in this situation because they are responsible for paying for extra or overtime costs. In order to protect the owner, time & material contracts will usually establish a maximum price clause. This type of contract is commonly used when the project scope is small
NOTE: Before agreeing to a contract, make sure that it is protecting both of your interests. Construction contracts entail a great deal of money and risk so; you must make sure you are choosing the right type of contract. This means you must do a research to know the construction contract suitable for the project you want to carry out because once you sign your name, there is no going back. With a little extra effort, you can customize the right contract for your project.