All businesses use contracts, but contracts are perhaps especially important to the construction industry. Even a relatively small construction project can involve financing, carpenters, electrical workers, plumbers and more, each of them with their own contractual demands and obligations.
Each of these construction contracts may be unique, drafted to suit the specific needs of the parties and the projects involved. Still, construction contracts do tend to fall into certain general categories. We will discuss some of the key types in this blog post.
- Lump-sum: One of the most basic types of construction contracts, the lump-sum contract, sets the price of the work in advance. The set price imposes a budget limit on the general contractor for its supplies, labor and subcontractors. While this type of contract can be a good fit for smaller projects, it is often not suited for more complex projects. As anyone who has ever been involved in the construction industry knows, material and labor costs can fluctuate and a lot of unforeseen problems can drive up costs quickly, leaving a contractor in the lurch when the agreed-upon price suddenly becomes insufficient to cover expenses.
- Cost-plus: This type of contract pays the construction company for all the materials they use, plus a specified amount for its profit.
- Guaranteed maximum price: This type of contract sets an upper limit on how much the owner will have to pay the contractor. This can be a great advantage to owners, as it controls for the possibility of unexpected spikes in the costs of materials, labor and more.
- Incentive: Some construction contracts come with incentives. For instance, a contract may specify that an owner will pay a bonus to a contractor if the work is substantially completed by a certain date.
- Design-build: In this type, a buyer or developer hires one company for both design and building services.
- Integrated project delivery: This type — relatively new in the construction industry — is similar to a design-build contract in that it involves using a single contract for both design and building. However, integrated project delivery contracts are signed by multiple parties, including the owner, the designer, the general contractor and potentially more. This type of contract can spread the rewards and risks to all parties, which can give all of them a sense of responsibility for the outcome.
Of course, many construction contracts use elements of two or more of the types listed above. As noted above, each contract may be unique. It’s a good idea for all contractors, designers and developers to work with professionals who are familiar with the advantages and disadvantages of multiple approaches.