Pros & Cons of Construction Contract Types
Construction contracts lay out the rights and responsibilities of the contractor and the project owner. There are a variety of construction contracts, and depending on the type, one party may benefit from a specific type of contract more than the other party. Each contract carries with it advantages and disadvantages that may benefit the contractor or the owner.
A lump sum contract is an agreement for a fixed sum. The contractor agrees to complete the scope of work for a fixed price and the project owner agrees to pay the contractor the lump sum price. The price reflects the cost of performing the work, the purchase of material and the markup for overhead and profit. The advantages of this type of contract are that the owner carries minimal risk, the cost is anticipated and the contractor may make more profit if it takes less manpower and materials to complete the project than anticipated. The disadvantage is that the contractor carries the risk if he underestimated the cost of the project. In addition, changes in the scope of a project can be expensive, and the contractor may use low-grade materials to save costs and increase profit.
Time and Materials
A time and materials contract is an agreement where the owner agrees to pay the contractor on an hourly basis, plus materials. The advantage for the contractor is that he does not have to anticipate the cost of completing the work as in a lump sum contract, and the advantage for the owner is that he will pay for the actual time worked. The disadvantage is that the contractor may work slowly because he is being paid for his time.
In a design-build contract, one contractor is in charge of designing and building the structure. The advantages are that the owner may save money by having one party implement two phases of the project, and the builder will understand the project since he implements the design phase as well as the building phase. The disadvantage is that the project owner must provide substantial detail about the project at the bidding stage since the contractor must determine the cost of completing the project.
A unit price contract requires the contractor to fix a price on each unit of work. The work, therefore, is broken down into parts. The pros of this type of contract include the flexibility in adjusting the scope and the fact that it is not necessary to know the complete design. The cons of this type of contract include the unknown cost to complete the entire project and a potentially inaccurate determination by the contractor of the quantities needed.