No two construction projects are alike. Therefore, no two contracts should be alike. The terms of a contract need to consider the parties involved, the scope and type of project and much more.
There are at least five leading types of construction contracts. Here we’ll take a brief look at them and when each is most appropriate.
Lump sum (fixed price)
This is the most common type. It’s used when the parties agree on a price for labor and materials that encompasses the entire project (or at least the phase of it that the contract covers). It’s most appropriate when the scope of the work is clearly defined, and there’s little chance of “scope creep.”
Unit price
A unit price contract is best used when the project contains multiple units with fixed cost for each, but it’s uncertain how many units there will be. Therefore, the contractor charges separately for each unit. A unit could be anything from an acre of land to a mile of road.
Time and materials (T&M)
A T&M contract specifies an hourly or daily rate for labor and requires that materials are paid for as they’re purchased. This helps contractors ensure they’re being paid throughout the project. It offers further protection if the scope and/or length of the project is uncertain.
Cost-plus
In these contracts, the project owner agrees to pay for materials and labor as well as a percentage of indirect costs and an agreed-on profit margin for the contractor. These are often used when the full cost of the project can’t be predicted.
Of course, the other parties to the contract will want to keep track of these costs to ensure they’re being accurately billed. They may not agree to this type of contract if they don’t know and trust the contractor.
Guaranteed maximum price (GMP)
These contracts specify a maximum cost for a project – taking into consideration profit. If the project comes in below the projected maximum cost, the contractor increases their profit margin. If they go over budget, the overage cuts into their profit margin.
They may be preferred if a contractor can oversee a project closely. However, other parties may not have an incentive to sign on.
The best way to help ensure that you have the right type of contract for a particular job and that the terms are the most favorable you can negotiate is get experienced legal guidance.
