A construction contract is the warranty that the executed job will receive the specific amount of compensation or how the compensation will be distributed. There are a several types of construction contracts used in the industry, but there are certain types of construction contracts preferred by construction professionals. Construction contract types are usually defined; by the way, the disbursement is going to be made and specifies other specific terms, like duration, quality, specifications and several other items.
Lump Sum or Fixed Price
This type of contract involves a total fixed priced for all construction related activities. Lump sum contracts can include incentives or benefits for early termination, or can also have penalties, called liquidated damages, for a late termination. Lump Sum contracts are preferred when a clear scope and a defined schedule has been reviewed and agreed upon.
Cost Plus Contracts
This type of contract involves payment of the actual costs, purchases or other expenses generated directly from the construction activity. Cost plus contracts must contain specific information about certain pre-negotiated amount (some percentage of the material and labor cost) covering contractor’s overhead and profit. Costs must be detailed and should be classified as direct or indirect costs. There are multiple variations for Cost plus contracts and the most common are:
- Cost Plus Fixed Percentage
- Cost Plus Fixed Fee
- Cost Plus with Guaranteed Maximum Price Contract
- Cost Plus with Guaranteed Maximum Price and Bonus Contract
Time and material contracts are usually preferred if the project scope is not clear, or has not been defined. The owner and the contractor must establish an agreed hourly or daily rate, including additional expenses that could arise in the construction process. The costs must be classified as: direct, indirect, mark-up, and overhead. Sometimes the owner might want to establish a cap or specific project duration to the contractor that must be met, in order to have the owner’s risk minimized.