The five main types of construction contracts are the lump sum, time and materials, the additional cost, the unit price and the maximum guaranteed price (GMP). Because there are many different types of construction projects, each type of construction contract exists to meet the different needs of all parties involved. Cost contracts plus contracts are used when the scope has not been clearly defined and it is the owner's responsibility to set some limits on the amount the contractor will bill. When using some of the options mentioned above, those incentives will serve to protect the owner's interests and avoid being charged for unnecessary changes.
Keep in mind that cost-plus cost contracts are difficult or more difficult to track and that more oversight will be needed. Flat-rate contracts are the most commonly used, especially for building construction. The idea is that all aspects of the project are predetermined and arranged in a fixed work area. The cost is known and upfront to the owner, and the contractor can manage expectations.
Lump sum contracts, also known as fixed-price contracts, are the most basic type of construction contracts. In the early stages of any construction project, the owner with his engineer or consultant prepares the documents necessary for the bidding process, which will be included in the contract. When managing construction projects, it is important to understand the different types of contracts in order to determine the appropriate scope of work. When it comes to unit price contracts, most of the risk lies with the owner, as they must reimburse the cost of unexpected units that are added.
Often, the type of contract will be largely defined by the customer and the type of construction project. Guaranteed maximum prices are a common feature in construction contracts and are better suited to projects with few unknowns. The contractor is at risk in the event of an increase in the cost of construction projects. A stock schedule is an essential tool used in construction project accounting that represents a list of jobs from start to finish.
There are several types of construction contracts used in the industry, but there are certain types of construction contracts preferred by construction professionals. The third commonly used type of construction contract is a time and materials contract, sometimes referred to as a “one-time cost agreement”. Cost contracts plus, also known as cost reimbursement contracts, involve the owner paying the contractor for the costs incurred during the project plus a fixed amount of money to make a profit, which can be determined by a percentage of the total price of the project. In some time and material contracts, especially when all labor or materials cannot be estimated in advance, there will be a “guaranteed maximum price (GMP)” that ensures that the budget does not exceed a certain threshold.
This takes longer, but making sure they're added to the contract will prevent you from losing money on later changes. In a cost plus fixed percentage contract, the owner will cover all materials and equipment and pay the construction contractor a fixed percentage to complete the works. This type of contract is ideal when the scope of the project is uncertain in the early stages of the project.
