Different types of construction contracts

A building contract is a legal agreement between a builder and a client, stipulating the terms under which the project will be executed. It estimates the cost of the project and a schedule for completion. Such a contract also has to spell out the penalty if what is agreed is not fulfilled. In short, a building contract is intended to protect the interests of both the builder and the client.

Lump-sum Contract

Also known as fixed price or stipulated plan, this type of contract states the work to be done at a certain amount of money. The project must be adequately defined to allow the contractor to estimate the total cost. Costs usually involve materials and labour, in addition to profit. Most builders assess profit and overhead expenses of between 12 per cent and 16 per cent on this type of contract, according to Physical Plan Services at the Oklahoma State University. Once the total cost of the project is determined, the builder has to provide a construction schedule and a quality control program. If the actual cost of the material and labour turns out to be higher than the estimate, then profit reduces, and the contractor can't ask for more money once the price is fixed and a contract is signed.

Unit Price

The contractor does not bear the risk of inaccurate estimation of uncertain quantities for key tasks. Basically, a unit price contract is based on the estimated quantities of items required in the project and the price of each. The work to be performed is broken into various parts, with each unit carrying its own price. The cost of painting, for instance, could be assessed per square foot. If the contractor is accurate in the assessment, the profit margin is likely to be higher than when inaccurate. Unit contracts are usually used in maintenance and repair work.

Cost Plus

The contractor is paid for the materials used and the actual cost of labour. Additionally, the contractor charges a fee for overheard expenses and profit. This type of contract is used where the scope of work and its total cost can't be determined. The contractor must complete the work while keeping records on all the expenses, which should be submitted at the end of the project for reimbursement, plus profit. Specifics of how the contractor is rewarded for the work varies according to the agreement with the client. The advantage of using cost plus is that the client can select materials and workmanship as the project proceeds. The downside is because the scope of the project is unpredictable, costs can easily go out of control.

Design and Build

A project owner contracts one company to design and build the project under this arrangement. The advantage is a design and build contract can be cost effective. The quality of work is also better because the builder has a clear understanding of the creative vision. The only disadvantage is that the client's involvement is limited. Decisions on the design, costs, profit and exigencies are determined by the contractor.

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About the Author

Gilbert Manda has written financial news since 2000. He holds a professional diploma from the London School of Journalism, a Bachelor of Science in global business and public policy from the University of Maryland and a Master of Arts in international journalism from City University London.

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