Every construction project is different and has its own unique requirements. As a result, no construction contract is exactly alike. There are several different types of construction contracts that vary based on the kind of payment structure the owner and the builder agree upon.
Here is a breakdown of the five main types of construction contracts.
This variety is the most basic type of construction contract, as it outlines one fixed price to be paid to the builder. These contracts work best when a clear project scope and schedule have been defined and agreed upon by both parties, as they simplify the bidding process.
However, they also pose a fair amount of risk to the contractor, as lump sum contracts don't account for delays or unexpected losses. They can also be risky for the owner because it is harder to get credit back for work left incomplete.
Overall, lump sum contracts work best for small projects with predictable scopes of work.
Cost-plus contracts, also known as cost-reimbursement contracts, specify that the owner will pay the contractor for the costs incurred on the project, plus a set amount of money for profit.
Costs covered under this type of contract include direct costs such as labor and materials as well as indirect costs such as travel and office space. The profit amount is an additional agreed-upon fee.
Cost-plus contracts allow the flexibility for owners to make changes while ensuring that the contractor will be paid for any extra time or materials the changes incur. But because these types of contracts work through reimbursement, fronting the cost of materials may be difficult for contractors.
As a result, cost-plus contracts are best suited for projects that require a lot of creative flexibility.
Similar to cost-plus contracts, time and materials (T&M) contracts reimburse contractors for the cost of materials, and they also establish a daily or hourly pay rate. This method covers any unexpected delays or changes to the scope of work, but with a fixed daily or hourly rate, there is not as much incentive for efficiency. Many owners opt to include a bonus clause for completing the work early, and they might stipulate a price cap or specific time duration.
T&M contracts are ideal for projects where the scope of work is small or not well defined.
Unit price contracts, also known as measurement contracts or measure and pay contracts, divide the project work into separate units. The contractor provides the owner with price estimates for each unit of the work, which allows for increased cost transparency.
These types of contracts are a good fit for projects where the work is repetitive or highly dependent on material costs, or the amount of work needed is unclear.
Guaranteed maximum price (GMP) contracts specify a cap on the contract price. Any expenses beyond that number are the responsibility of the contractor. GMP may also be included as a provision in other types of contracts where a cap is beneficial, such as a cost-plus contract.
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