Construction contracts protect both the builder and customer for a specified building or remodeling job. These different types of construction contracts, or legal documents, usually lay out the specific amount of compensation for the job and its distribution. They are binding agreements between the two parties designed to protect them both. They also typically define the fixed terms of the build including duration, specifications, materials, and quality.
Customers want to know the types and structures of contracts in order to know what to expect for the project and what to expect from the builder’s approach. Though many commercial construction manager customers and buyers may be aware of these contract types, it is helpful to have a quick, high-level reference and to know what types of contracts are preferred. Being prepared for project bids and agreements is always wise for construction customers to go forward. Though there are many different types of construction contracts, these are the four most commonly used in commercial (as well as private) builds.
- Unit Pricing Contracts
- Lump Sum or Fixed Price Contracts
- Time and Material Contracts
- Cost Plus Contracts
Each of these have variations and can be customized to suit the job. All of them ensure that the needs of the project are met and the parties protected. This blog post focuses on the first two contract types: Unit Pricing and Lump Sum or Fixed Price Contracts (and we will focus on Time and Material and Cost Plus Contracts in our next post).
Unit Pricing Contracts
A unit pricing contract is used most often by builders and federal agencies. This type of bid is written for projects where the scope isn’t totally certain. This means that the quantity of materials, the labor, rate per unit work volume, and other factors can be estimated. Work can begin prior to finalizing specifics.
Generally speaking with this contract, the profit and overhead for the contractor is included in the rate. When the contractor provides unit prices, it allows the owner/buyer the opportunity to easily verify their charges. These types of construction contracts help the buyer ensure that the prices for the goods or services are un-inflated. It also allows the parties to adjust up or down for scope changes, making it easier to reach an agreement and keep violations to a minimum.
Lump Sum or Fixed Price Contract
These types of construction contracts have a total fixed price for all activities related to the construction. They are probably the most common construction contracts, and used when pricing is decided upfront. Lump Sum Contracts are used most often when there is an agreed upon scope and defined schedule. This contract transfers risk to the builder and is utilized when the buyer or owner wants to avoid change orders for work that hasn’t been specified.
These contracts also can include penalties, also known as liquidated damages, for late completion or incentives for early completion. Because the risk is transferred to the builder they usually include a percentage cost within the fixed price. Lastly, on a Lump Sum Contract, the contract emphasizes the builder’s stake in the work throughout the project until it is complete.
Staying alert to pricing structures helps construction manager customers and buyers feel confident in the face of any changes to building construction needs in a project. While Unit Pricing and Lump Sum contracts were the focus of this blog post, our next post focuses on two others, Time and Materials and Cost Plus contracts. Please visit our next blog post to finalize our summaries on approaches to these agreements. Ready to discuss your own building bid? Contact BuildRite Construction for a great project and customer experience.