Which Type of Construction Contract Should You Use?

The construction industry can be complicated. Not only do you need to build the project according to the plans, but you also need to have the right documentation in place. A contract is essential for every type of job, but there are several types of contracts to choose from. Which one is right for you?

Each contract has its pros and cons. Here’s a look at four main types of construction contracts you’ll need to choose from.

Lump Sum Contracts

Lump sum contracts are also known as fixed price contracts. These documents establish a fixed price for all of the materials and labor required to complete a job. This is the most commonly used construction contract. These contracts work especially well for projects with a well-defined scope of work. While a well-calculated bid can cover all project costs and leave a healthy profit margin for the contractor, the final cost is set, so there is an incentive to cut corners.

Time and Materials Contracts

These contracts reimburse contractors for material costs. They also pay a fixed daily or hourly wage for labor costs. This type of contractor is good for contractors because it helps mitigate risk. It offers greater assurance that costs will be covered throughout the project despite delays and changes. However, this type of contract can be risky for homeowners because they face unknown and potentially high costs.

Unit Price Contracts

These contracts set a fixed price for a distinct aspect of a project, known as a unit. An example of this in action would be a contractor building 10 miles of highway may have such a contract, with each mile of highway representing a unit. Since the same labor and materials will be used for each mile of road, the contractor can bill for each of those units at a fixed price. If the scope changes and additional sections of the highway need to be built, for example, the contractor can simply bill for additional units. While this type of contract can simplify tracking and billing, if the contractor does a poor cost estimate, they may not make much profit.

Cost-Plus Contracts

A cost-plus contract is highly beneficial for contractors, as it reimburses them for construction costs along with a predetermined markup rate or fixed fee. Both direct and indirect costs are covered, with markup typically calculated as a percentage of the total costs. This means the exact amount can vary according to the length and scope of the project. While this contract reduces risk for contractors, the owners are left at a huge disadvantage, as they do not know the exact cost ahead of time.

Contact Us Today

There are various construction contracts to consider. They each have pros and cons, so choose the right one for your job.

A Florida construction contract lawyer from Linkhorst Law Firm can help you make a choice. We can assist with various duties, including contract drafting, negotiation, and administration. We work hard to ensure our clients’ rights are protected, their interests are represented, and each party’s responsibilities are clearly outlined. Schedule a consultation today by calling 561-626-8880 or filling out the online form.

Source:

procore.com/library/construction-contract-types