This type of construction contract is not usually used for large construction projects and is more commonly used for small jobs such as repair or maintenance. With unit price contracts, it is easier to adjust prices when the scope of work changes. This type of contract is ideal when the scope of the project is uncertain in the early stages of the project. The contractor can begin executing the project before completing the design. It is not possible to estimate the cost of the project before construction is completed. Under a cost-plus contract, contractors are paid for all construction-related expenses. This is the cost part of the name. Costs can include direct costs such as labor, materials, accessories, etc. They also include overhead costs such as insurance, mileage, part of your office rent. In addition, they receive an agreed amount for profit. This is the «plus». It`s important to understand the different types of construction contracts, as they determine what you pay, what you`re responsible for, and many other aspects of the job. A contract protects both the builder and the owner by ensuring expectations are clear from the outset and avoiding potential headaches caused by surpluses and other unforeseen problems.
There are many types of construction contracts, which are usually tailored to the needs of the project. Unlike lump sum contracts, time and material (T&M) contracts work best for projects where the scope of work is not clearly defined. Time and materials contracts reimburse contractors for material costs and set an hourly or daily wage. To help you familiarize yourself with your options, we`ve explained the differences between the different types of contracts and when you should consider using them for your projects. We use «builder» to refer to the company that provides the construction services and «owner» to refer to the company that hires the contractor to provide construction services. Learn more about the four most common types of construction contracts below. One of the characteristics of construction projects is uniqueness. Each project has its own circumstances, so it`s important to choose the type of contract that`s right for the project. The owner develops the process of selecting the type of contract. Below are the types of construction contracts commonly used in construction-1 projects.
Lump sum contract2. Contract to one copy3. Cost-plus contract4. Target-cost IPD contracts are popular with teams that want to prioritize innovation and collaboration. They foster a sense of belonging and teamwork, as all parties must work together to achieve the desired rewards. They also distribute risk and return equitably among the parties and promote greater accountability for project results. There are different types of costs and contracts tailored to different project requirements. Each type of contract also reduces different risks for the owner. Here are some examples: Unit price contracts are beneficial when an owner knows exactly how much of a particular product they need. Using this type of contract and buying all units at the same time is also a great way to protect yourself from possible future material price inflation.
By buying all the items at once, owners usually pay less than in the future and don`t have to worry about signing another contract in the future. Costs covered by cost-plus contracts may include direct costs (i.e. direct labour and material costs), indirect costs (i.e. office space, travel and communication costs) and profits (i.e. agreed costs or surcharges). This contract is ideal if the scope of the project is clearly defined at the design stage, as the flexibility to modify the design during the construction period is limited. Incentive agreements provide the contractor with an agreed-upon payment if the project is delivered on a specific date and time. If the project is delivered at a lower cost and/or on the target date, the contractor will receive additional payment.
The amount they receive is indicated in the contract and can be based on a sliding scale. In other words, the contractor has an incentive to control costs and meet deadlines. When drafting a construction contract, specify exactly how and when you want a contractor to communicate. This communication can take the form of regular checks or simply when there are significant changes, but both parties need to know when to do something from each other before making decisions. Lump sum contracts are preferred when a clear scope and timetable have been discussed and agreed. By integrating information about communication and changes, construction contracts streamline the decision-making process. Ideally, the risks of the project were anticipated and the contract outlined the best course of action. A construction contract is first and foremost an agreement, but it also serves as a roadmap.
Now that you know the most common types of construction contracts, learn how to set up construction cost management. You`ll discover six ways you can improve your approach to reduce risk and increase efficiency. Unit price contracts are more commonly used for repetitive work and public works projects. For example, routine building maintenance could be more easily billed through a unit price contract, as it specifies the values of the various maintenance tasks required (e.g. painting, insulation testing, etc.). In this sense, construction contracts should remain clear and free from unnecessary details. Find a balance between anticipating everything that needs to be included and editing information that dilutes key points. Cost-plus contracts are generally used when scope of work, materials, labour and equipment are not clearly defined at the outset or are difficult to estimate. Projects that use this type of contract are more likely to be completed as planned, as builders are not completely constrained by costs. However, this type of contract is more complex to manage and requires precise monitoring.