The most commonly used type of construction contract is a lump sum or fixed price contract. This is where the parties agree on a price for the whole project or at least the phase that the contract covers. Lump sum contracts are typically recommended only for construction projects with a specified scope of work and where there’s little or no uncertainty around the cost of materials or labor.
These contracts are often preferred by contractors – specifically general contractors – because they can have considerable control over the project and work to ensure that it comes in at or under budget. Of course, a strong force majeure clause is crucial to protect the contractor from unforeseen and extraordinary circumstances.
Property owners may balk at agreeing to a fixed price contract unless the contractor is someone they know and trust. With a fixed price contract, a contractor has an incentive to finish the project under budget, which can result in a nice profit since they don’t have to return the overage.
Some property owners put a construction manager on the site to help ensure that corners aren’t being cut. When a contractor has a reputation for honesty and solid work, it can be easier to get others to agree to a lump sum contract.
How is a GMP contract different?
Another option for projects where the cost is easy to estimate and unlikely to grow is a guaranteed maximum price (GMP) contract. That’s where the contract specifies a maximum cost for the project – including any overhead and profit. If materials or labor end up costing more than they anticipated, that eats into the contractor’s profit margin. That’s why general contractors typically oversee these projects closely.
The advantage to the property owner of a GMP contract is that they may end up paying less than the maximum. However, they’ll likely want to see invoices and other records to ensure that the costs are being reported accurately.
Determining which type of contract is preferable for each project is crucial for construction professionals. It can make all the difference between a project being profitable or not. It’s also critical to be able to show the other party to the contract how it benefits them. Having experienced legal guidance with every contract can be highly valuable.