Contracts make the construction world go round, but do you know which is the right contract for your different jobs? Construction contracts come in different forms, and no single type works for every project.
With some good fortune, you’ll fulfill a lot of contracts. Knowing up front which one applies will help you protect your company, and also the owner who makes the project possible.
Lump Sum or Fixed Price
Of the three types of construction contracts used more often than the rest, the Lump Sum or Fixed Price type is probably the most common of all. This is part of the “Design Bid Build” system where the property owner presents the project details to several different contractors to secure the best bid possible.
The law offices of Peckar and Abramson explain that a Lump Sum or Fixed Price contract is best used when the full scope of the project is known in advance. If there are a lot of variables, it won’t work. The contract should contain a clear outline of budget and costs, scheduling and deadlines, and as many other critical factors of the job as possible. With this contract, the more you know in advance the better.
Cost Plus Contracts
A Cost Plus contract leaves more of the details open. Where the timeframe and the cost of materials are unknown or at least partly unknown, this type of contract ensures that the money will be there to cover materials, often fitting within a predetermined budgetary range. The payment to the contractor for fulfilling the contract can be negotiated.
A Cost Plus contract is an arrangement that promises to pay for the cost of job materials plus a payment to the contractor for the work performed. The contractor’s payment might be a percentage fee or a set amount, depending on the job. The contract might also include the potential for a bonus if the job stays under a certain budget or is completed within a certain timeframe.
Time and Material
Time and Material contracts work when many of the project details are unknown. Maybe the owner hasn’t sourced materials and doesn’t know the costs involved. Maybe the project deadline isn’t set yet because of other variables that haven’t been nailed down yet. For whatever reason, a Time and Material contract works when there’s still more to learn about the project scope.
Sometimes seen as the least favorable type, Time and Material contracts agree that the contractor will be paid based on a set hourly rate for labor, and that the actual cost of materials and other incidentals will be paid by the owner. Additionally, Business Dictionary explains that the contractor’s profit and overhead are agreed on as a separate fee. When the project doesn’t really have a clear scope and many details are unknown, this type of contract is suitable.
Construction contracts help keep work flowing and contractors paid. They’re a necessary element in any job, since you never truly know what will happen on a job site. The right type of contract covers the work at hand, and that’s why there’s more than one. Even if you built the same house on two separate lots, no two jobs are ever identical.
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