There are different types of contracts in the construction industry. Some people would think it’s just as simple as writing on paper how big the project will be, when it will be delivered, and how much it will cost. 

Contractors and project managers should know what contract to use by considering the project’s scope, budget, schedule, and other factors. The contract type you’ll use can determine the outcome, profitability, and customer satisfaction. To be familiar with the different contracts used in construction, read this blog article now. 

Design-Build Contract

Typically, a construction project requires contracts with the designer and contractor separately. But a design-build contract deals with these two entities simultaneously. This approach saves time and budget because the design and construction are under a single contract.

One company provides both architect and contractor who collaborates on the project from the start. These professionals can give unified recommendations for the project. There will also be a shared responsibility, which prevents blame-shifting in case the project encounters problems. 

Cost-Plus Contract

The contractor in a cost-plus contract will receive payments for project-related expenses. It may include costs of labor, supplies, and materials, among other things. Insurance, office rent, mileage, and other overhead costs will also be included. Plus, the contractor receives a part of the profit. 

The advantage of this contract type for contractors is that there’s zero risk of losing money on materials. A cost-plus contract is good if you can’t provide a thorough estimate of the project scope or the amount of work required. However, there can be a limit on how much you can spend, and you must keep track of all expenses. 

Lump-Sum Contract

This construction contract is suitable for a project with a well-defined scope. Under a lump-sum contract, the contractor gives a total preset price instead of bidding on deliverables. The contractor can focus more on output, materials, and quality. Plus, such agreements streamline the selection process and business analysis. 

However, a lump-sum contract may not be advisable for complex construction projects. This contract leaves out changes in site conditions, owner requests, and materials costs from consideration. You must do a thorough estimate of materials, labor costs, overhead costs, project schedules, and profit. 

Incentive Construction Contract

Under an incentive construction contract, the contractor receives an agreed-upon payment if the project is completed at a target date. There’s also additional payment paid to the contractor if he can deliver the project at a lower cost. The contractor has to control project costs and focus on the target deadline. 

Since this contract provides more control to the contractor, it promotes collaboration between the contractor and owner. The catch is that the contractor must ensure the deadline and costs are attainable. Disputes may ensue if terms and conditions aren’t met. Careful negotiation is also a must to determine the incentives. 

Guaranteed Maximum-Price Contract

The owner must pay the contractor a capped maximum amount under this contract. If there are additional costs for the project, the agreement has to cover that amount. The owner enjoys very minimal cost risk under a guaranteed maximum-price contract. 

It’s easy to budget for the construction project, and the amount the owner has to pay is well-defined. The costs included in a GMP contract are materials, labor, overhead, and a percentage of the expenses for profit generation. 

The disadvantage of this contract type is that it can consume lots of time because of the need for a thorough review and estimate of the expenses. Moreover, it puts much of the risks on the contractor. The contractor can lose financially if the final cost is higher compared to the original estimate. 

Unit Price Contract

This contract type presents prices per unit, including labor, supplies, materials, overhead, and profit. The contract receives due payment according to agreed-upon rates. The agreement may or may not factor in how many units are required to complete the project, but there will be an estimate for the units. 

If a project can be split into units, a unit price contract is a preferable option. It also works well for projects that involve repetitive tasks and are highly dependent on the price of units. The straightforward invoicing and shared risk are also advantageous for contractors who choose this type of contract. 

However, a unit price contract may not be suitable for complicated projects, especially those that require various materials and complex tasks. Contractors work with no incentives and may lose profit if they fail to hit their estimates. 

Final Thoughts

If you don’t have an idea about what types of contracts you’ll use for a construction project, you should be familiar with unit price contracts, design-build contracts, cost-plus contracts, guaranteed maximum price contracts, lump-sum contracts, and incentive construction contracts. Determine factors, such as project scope, budget, and schedule, and consider the contract type suited for the project.