Types of Construction Management Contracts (continued)
In our previous blog post we disclosed two common types of construction contracts - Unit Pricing and Lump Sum or Fixed Price Contracts. In this post we focus on two other pricing construction management contracts - Time and Material and Cost Plus Contracts. For construction manager customers or buyers, it is invaluable to identify the types of builder contracts used and how that effects the overall final project pricing. Because of the importance and value of quick reference and disclosure for these types of construction management contracts, we’ve devoted these two blog posts to the topic.
Time and Material Contracts
When the scope of the project is not clear or is undefined, Time and Material Contracts are typically used. This type of construction management contract is built on an agreed hourly or daily rate and can include additional expenses that could pop up during construction. These expenses are included in the contract and noted as direct, indirect, overhead, and markup.
Sometimes the buyer or owner will want or need to set a limit on the project’s duration in order to minimize their risk. Time and Material contracts are suited for this type of project; when the buyer can make a realistic guess on how long it will take to complete the scope.
Cost Plus Contracts
When the construction activity involves ancillary purchases, variable actual costs or other expenses that need payment, a cost-plus contract is often used. These contracts have to contain and outline specific information that covers a builder’s overhead and profit. Essentially, the contractor is paid for all of the expenses of the job, plus profit. These profit amounts are pre-negotiated and are a percentage of labor costs and material. Within the construction management contract these costs have to be detailed and classified as indirect or direct costs.
These types of construction contracts are used when it is the responsibility of the owner to establish billing limits of the contractor or builder and there isn’t a clearly defined scope. This serves as a protection to the owner and can help them avoid being charged for unnecessary changes. However, cost-plus contracts can be harder to track and require more supervision, and put most of the risk on the owner.
In summary, regardless of what type of building or remodeling project an owner is getting bids for, some type of construction management contract should always be used. Construction contracts help projects run more smoothly and ensure that the interests of both the builder and the owner or buyer are protected. Contracts can be adjusted to suit the needs of both parties, helping keep surprises at a minimum, and ensuring a smooth transaction. Although Time and Materials and Cost Plus Contracts are only two types, feel free to refresh your overview of the other two contract types (which we consider most common) from our previous blog post on Unit Pricing and Lump Sum or Fixed Price construction agreements. Ready to discuss your own building bid? Contact BuildRite Construction for a great project and customer experience.
