What are the different types of contracts in construction?
Answers
Answer:
The most common types of contracts that are used for construction projects include:
Lump sum or fixed price contracts. Lump sum contracts involve the buyer agreeing to pay a set price and the contractor or builder agreeing to complete the project for that set price. With this type of contract, the buyer has certainty because he knows what his final costs will be unless changes are made. The builder or developer takes on the risk, because if prices go up or problems arise, the buyer will not have to pay any more money. Some lump sum contracts include allowances, which can mitigate risk to builders because if the buyer goes over the allowance, the cost is borne by the buyer. Lump sum contracts can sometimes include benefits or incentives for completing projects under budget or in a shorter period of time, and can sometimes include liquidated damage clauses so the builder will have to compensate the buyer for being late to finish.
Cost plus contracts. Cost plus contracts involve the buyer paying the actual costs of construction and purchases plus an additional set percentage or amount for the contractor or builder. The owner takes on the risk here, because if it turns out the project is much more expensive, the buyer will be the one to pay for the cost of construction plus the profit margin. Cost plus contracts can be structured in different ways, including cost plus with the builder making a fixed percentage of costs; or cost plus with a fixed fee or set amount for the builder. It is also possible for a cost plus contract to specify a guaranteed maximum price, so the buyer can mitigate risk.
Time and materials contracts. A time and materials contract means the buyer pays for the time spent by the builder and his subcontractors and must pay for the actual costs of construction materials. There is uncertainty involved for the buyer here as well, since the buyer has to pay for extra costs or time overruns. Many time and materials contracts will contain maximum price clauses as well.
Brown & Charbonneau, LLP can provide advice on which of these contract types makes the most sense in your situation and can help to negotiate the final terms of your agreement. We have extensive experience with all types of construction contracts for both residential and commercial property development and we know how to make sure your rights are protected under California construction law.