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What are four common types of construction contracts?

On Behalf of | Apr 26, 2022 | Construction Contracts |

Construction contracts in Roseland, New Jersey provide a binding agreement for the builder and the owner. One important function of the contract is to specify what the contractor’s compensation is per the job. Here are four common construction contracts preferred by professionals.

Fixed-price contract

Lump-sum construction contracts involve a total fixed price for all construction activities. Fixed-price contracts may include incentives or benefits for early terminations. Fixed-price contracts may have penalties or liquidated damages for late termination. This type of construction contract transfers the risk to the builder and helps the owner avoid changes from unspecified work. A contractor adds a percentage cost for carrying the risk to the fixed price. It’s harder to get credit back for work not completed with a fixed-price contract.

Cost-plus contracts

Cost-plus construction contracts involve payments for the actual construction expenses. Cost-plus contracts have specific information about percentages of pre-negotiated material and labor costs. The contract covers the contractor’s profit and overhead. All construction activities are direct or indirect costs, which may include fixed percentages or fees. Costs may include guaranteed maximum price and bonus contracts. Owners can use cost-plus contracts to add limits to a project without a defined scope.

Time and material contracts

When a project scope isn’t clear, time and material construction contracts are popular. The contractor and owner negotiate an hourly or daily rate for the project. The contract classifies costs as markup, overhead, direct and indirect. Costs cover any extra expenses, but the owner can set a cap. Owners can limit the length of the project as well. The contracts work for projects that are easier to estimate the duration of.

Unit pricing contracts

Builders and federal agencies commonly use unit pricing construction contracts. Unit prices may be available during the bidding process. The owner can request pricing and quantities for a predetermined number of items. An owner can review the costs to see if they’re getting accurate prices. Unit prices can adjust during scope changes, which makes negotiating easier.

The types of construction contracts depend on the way disbursement happens. The specifics of construction contracts include quality, duration and specification. Construction contracts depend on the customized needs of the project or product.