With the various types of construction contracts available, it may be difficult to know which one to use with a particular project.
Understanding the ins and outs of the types of construction contracts can help builders and owners know which one will best serve their interests given the type and scope of the project.
This article will discuss the purpose of construction contracts and outline the different types of contracts most com monly used.
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Construction contracts can be extremely long and complex. They can range from 500-600 pages because of the plethora of forms that need to be attached.
Each cost must be accounted for — from materials costs to necessary parking fees for contractors.
What if there was a way to work from a professional contract template that would ensure that clients and other working parties were on the same page?
Flexbase can help establish peace of mind by:
And if our contract templates don’t suit your needs perfectly, users have the option of creating their own custom templates.
Flexbase also automatically pulls all the compliant forms you’ll need depending on the county/state of the project, ensuring that all your bases have been covered.
In the end, Flexbase’s job is to make sure you have everything you need in the easiest and most automated way possible — no more manual contracts.
In just two minutes, Flexbase can generate payment apps with:
A construction contract is designed to outline the various details of a construction project including:
Many parties are often involved in construction projects:
Contracts are necessary to outline expectations from the outset, thus protecting each individual involved in the project.
Construction contracts work by setting out all the terms and conditions of a specific construction project.
These contracts provide information about the risks, scope of the project, payments, and obligations to help manage risk for both the owner and the contractor.
Not only are construction contracts complex, but they are also varied.
Different types of construction contracts are available, and choosing the contract to use will be dependent on various factors like:
The four most common types of construction contracts are discussed below.
For each type of contract, we’ll:
Time and materials contracts are agreements where the owner and contractor consent to an hourly or daily rate including reimbursement to contractors for the cost of materials or additional expenses.
All costs must be categorized in the contract as:
There is risk involved in time and materials contracts because of the unpredictability of time and work estimations. The owner may end up paying more for the job if the project takes longer than expected or supplies cost more than anticipated.
For this reason, sometimes price and duration caps are set to protect the owner’s interests.
Time and materials contracts may be ideal for:
Lump sum contracts, also known as fixed-price or stipulated sum contracts, are the most basic type of construction contracts. This type of contract sets one price for all the work done on a project.
Though lump sum contracts seem clear cut, they may involve risk, particularly to the builder.
If unexpected setbacks occur, builders and contractors may end up making less money or even losing money because owners are not required to pay for costs above the agreed-upon price.
To combat this risk and protect their interests, builders may add allowances that will cover any unexpected costs.
Lump sum contracts may be preferred for smaller projects or those with a clear scope and an established timeline.
Also known as cost-reimbursement contracts, cost plus contracts are agreements where the owner pays the contractor for project expenses and an agreed-upon amount for the contractor’s overhead and profit.
The price for the contractor’s overhead and profit must be negotiated ahead of time. Costs must also be detailed and labeled as direct or indirect costs.
Direct costs include things like labor and materials, while indirect costs are those having to do with office, travel, and communication costs.
Most of the risk with cost plus contracts lands on the side of the owner since any unforeseen costs are the owner’s responsibility.
There are 3 different types of cost plus contracts. Each one is designed for different kinds of projects and also helps reduce the risk for the owner.
Cost plus contracts are best for projects where the scope of the project has not been clearly defined and where more creative flexibility is necessary.
Unit price contracts are used when contractors give prices for each part rather than the whole project. Simply put, the price for the project is divided into several units.
Unit price contracts may also be called:
These types of contracts are dependent on costs of materials, but prices can be set during the bidding. And sometimes the scope of the work isn’t evident before the project is started.
Transparency is a huge benefit to the owner with unit price contracts because they can know if they are being charged inflated prices.
Additionally, if plans need to change during the project, owners and builders can make adjustments in unit prices that they can agree on.
Unit price contracts are common for projects where the work is repetitive or for public works projects like painting, testing insulation, etc.
These types of contracts are also used for small jobs and maintenance repairs.
H4: Pros and Cons of Unit Plus Contracts
The three most common types of construction contracts are:
These contracts are used for a variety of projects and come with both benefits and risks to either the owner or the builder.
When choosing the right contract for a particular project, owners and contractors should consider all the factors involved in the project to make the best decision.
In general, if the project is small, lump sum or time and materials projects may be the best choice.
On the other hand, for large projects or ones that require more flexibility, cost plus contracts may be the way to go.
We’ve learned about the different types of construction contracts, but you may still be feeling overwhelmed with the many other details that go along with construction projects.
Establishing the contract is only one part of the process. There’s still payment, legal documents, price estimates, among many other details, that need to be considered.
Flexbase helps to make the whole process smoother and streamlined. With automated paperwork and compliance, there is nothing to worry about.
In addition to a compilation of all the necessary forms and documents, Flexbase can manage your cash flow and send invoices and paperwork to customers in just minutes.
With Flexbase, you’ll experience:
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