If you are working in the construction industry, you may be familiar with different types of construction contracts. A construction contract is a legal written agreement between the owner and the builder.
A Construction contract, in its essence, is simply an agreement between two or more parties, where particular services are provided in exchange for money. Any legally binding construction contract must include three things: An offer, Consideration, and Acceptance.
Contract in construction is a crucial document that helps to carry the project from start to finish as designed and described. The owner can form a contract with other parties in various agreements in order to complete a specific project. So, depending on the nature of work, construction contracts differ from project to project.
A project can have multiple contracts as needed. The sole authority of deciding the type of contract for a particular project lies with the “Client” or the “Employer”. The client can either enter into a contract with a single Turnkey contractor or employ multiple contractors for different parts of the project.
Several types of construction contracts can be used in construction filed. However, constructional professionals prefer specific types of construction contracts to avoid dispute and the project requirement.
These are the important elements every construction contract must include.
- Full name, address and signatures of both parties
- Scope of work
- Payment terms and the cost of payment
- Work schedule
Basically, construction contract types define the way contactor payment will be made and other specific contract terms, details like quality of the work, project duration, penalties for delays, specifications, and some other items.
Types of construction contracts
Depending on the clients’ preference, some of the most common construction contracts are:
- Lump-Sum/ Fixed Price Contracts.
- Unit Price/ Item Rate Contracts
- Cost Plus Fixed Fee Contracts
- Time and Material Contracts
- Guaranteed Maximum Price Contracts
- Percentage Rate Contracts.
These are mostly used construction contracts based on the nature of construction projects.
Lump Sum Contract
Under lump sum contract agreement, a contactor agreed to work on a project or part of the project with a fixed price. The client will pay a set of amounts after completing the works as described in the specification. Lump sum contract has pros and cons, but overall it is a high-risk method for both construction company and client.
Typically, contractors do not require to provide a detailed costs break down structure for each item. Contractor links the total contract price for completing all the work specified in the contract.
Under this contract arrangement, the contractor will get paid for the actual labour and materials costs, in addition to that they can charge a fee for overhead and profit (It is typically an agreed percentage of the total costs).
Time and Material Contracts
When the project scope is not clearly defined, time and material contracts are selected by the construction firm.
Under this contract, the client and the contractor have to establish an hourly or daily rate, and also mention additional expenses that could arise in the construction process. All cost including direct, indirect and overheads must be covered in the contract.
Unit Price Contract
Under the unit price contract, the contractor gets paid for actual quantities of work finished. Unit price is defined in the bill of quantities (hourly, day rates, rate per unit work volume, etc.)