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How savvy are you about your construction contracts?

Contractors generally deal with different versions of four common construction contracts. These binding legal agreements protect both the contractor and the property owners in the event of disputes over the scope or quality of the work in question.

Below are the four types of contracts that are likely to be used by construction professionals.

Fixed price/lump sum

With these contracts, there is a fixed price for all construction services. But there can also be incentives included for finishing the job under schedule. Conversely, penalties may accrue for delays and setbacks. These type of contracts should only be used when the scope of the project is defined and clarified and the schedule is accepted by both parties.

Cost plus contracts

These contracts cover the expenses, purchases and costs that are generated from the construction. To be valid, they have to include certain details regarding pre-negotiated amounts, as well as percentages of costs for labor and materials. The amounts must also include the profit and overhead. Costs are listed as direct or indirect. There can be variations of these contracts, including:

  • Cost plus fixed fee
  • Cost plus fixed percentage
  • Cost plus with guaranteed maximum price and bonus contract
  • Cost plus with guaranteed maximum price contract

All of the above are useful when a project's scope is quite broad or undefined. The owner is responsible for establishing contractor billing limits. They can be more challenging to supervise and track and present more risk to the owners than contractors.

Unit pricing contracts

Federal agencies typically use these contracts, which allows the property owners to ensure they get the lowest prices possible for services and goods. Should the project's scope change, pricing can be altered accordingly.

Time and materials contracts

When the scope of a project is unclear or undefined, these contracts are normally used. Both contractors and property owners set the daily or hourly rate, with the necessary expenses included.

Whatever contract you wind up signing, it's always wise to have your legal team review it for accuracy first.

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