The warranty that a completed job will receive compensation is called a construction contract. This document ensures compensation and defines how it is distributed. Although there are several types of construction contracts used by industry professionals, specific types of agreements are preferred by most contractors. The types of contracts are usually defined by how the disbursement is made. Contracts also specify the duration, quality and other details involved with the project.
Time & Material Contracts
These types of contracts are often preferred by contractors who have a project with an unclear scope. They are also popular in situations where the scope has not been defined at all. With these contracts, both the owner and the contractor must develop and agree on a daily or hourly pay rate. There must also be inclusions for additional expenses that may come up in the process of construction. All costs must be classified in one of the following categories:
In some cases, the owner may want to set a limit on the amount of time a project will take. This step is taken by owners who want to minimize their risks.
Fixed Price Or Lump Sum Contracts
With this type of contract, a fixed budget is set for all of the materials and activities related to the construction process. These contracts may also include special benefits or incentives for workers who finish the project early. However, they may also come with penalties, which are called liquidated damages. Penalties are imposed when the project is not completed in the amount of time allowed. Lump sum contracts are often preferred by contractors who have a defined scope, and they are also beneficial in situations where the owner and contractor have agreed on a schedule or time limit.
Cost Plus Contracts
With these contracts, payment of the actual costs for the project is a key component. This includes all material purchases and any other expenses related the project. Cost plus contracts must have detailed information outlining items that have been previously agreed upon. This information should include a percentage of the labor and material costs, which should cover the contractor’s profit and overhead. All costs should be classified and detailed properly. There are several different variations of the cost plus contract. In addition to the cost, the most popular forms include either a fixed fee, a fixed percentage, a guaranteed maximum price or a maximum price with a bonus contract.
To determine which type of contract is best, discuss the topic with an agent. It is important to choose the best option for the project, and every contractor’s needs vary based on project details.