From the beginning of your construction project, you will be dealing with contracts. A contract for a construction project can be dense and complex, and taking your time to read and review it is wise. Once you sign the document, you are legally bound to its terms, whether you have read and understood it or not. Some terms include a timeline for completion of different phases of the project, a breakdown of costs and agreement on how to handle any disputes that may arise.
There are four basic kinds of construction contracts — lump sum, cost plus, time and materials, and unit price — each of which has its own benefits and restrictions. It would be a good idea to know the basics of these common types of contracts construction companies use so you know what to expect, how best to negotiate for your best interests and how to recognize when someone has breached the terms of a contract.
Lump sum and cost plus
As the name implies, lump sum contracts name a total price for the entire project with no extra charges added on. The contractor who does not complete the work by the deadline may face penalties, or you may offer incentives for the contractor to finish ahead of schedule.
If you sign a cost plus contract, you will be reimbursing the contractor for his or her expenses plus an amount of profit you agree upon. The profit can be a percentage or a fixed amount, and your contract may also include cost caps to protect your bottom line and incentives to motivate the contractor.
Unit price contracts, time and materials
With unit price contracts, you agree to pay a fair price for each unit or phase of work on a project. The contractor may add materials, labor, profit and other costs into the price of each unit. Unit price contracts may work if the project will involve construction of similar repetitive tasks. This type of contract works well for government projects.
If your project has no defined schedule or you have no way of reaching an accurate estimate for the total cost of the construction, you may opt for a time and materials contract. You and the contractor agree on a rate per hour or day and include the cost of materials or other expenses, as well as a markup. You may also wish to negotiate time and cost limits. In fact, negotiating the terms of any contract and seeking a professional review before signing is your right.