A construction contract provides a legal binding agreement, for both the owner and the builder, that the executed job will receive the specific amount of compensation or how the compensation will be distributed. There are several types of construction contracts used in the industry, but there are certain types of construction contracts preferred by construction professionals.
Construction contract types are usually defined by the way, the disbursement is going to be made and details other specific terms, like duration, quality, specifications, and several other items. These major contract types can have many variations and can be customized to meet the specific needs of the product or the project.
Creating a good construction contract is a skill that every builder should know inside and out, whether he or she is a solo owner-builder or the head of a large construction firm. Although various contractors use different checklists when creating a contract, there are commonalities that should be followed no matter what form the printed contract takes. In most good contracts, the builder starts with the most basic of line items, adapting the contract to the complexity of the project.
Aside from the construction work itself, creating the contract is one of the most important parts of the project. The more detailed the contract the better; even items considered common sense shouldn’t be overlooked.
There are seven major areas to consider when developing your skills at creating successful contracts for your construction business.
Types of Construction Contract Documents
At the early stages of any construction project, the owner with his engineer or consultant prepares necessary documents for the tender process, which will be included in the contract. These documents are called contract documents.
Types of Documents in a Construction Contract
The different types of documents in a construction contract are as follows-
Drawings and specifications
B.O.Q (bill of quantity)
Letter of acceptance
Conditions of Construction Contract
The conditions of contract are terms that rule the relationships between the owner and the contractor, define each party’s rights and obligations, specify the method of payment and determine actions required when existing any disputes between the owner and the contractor.
General conditions of contract
Special conditions of contract
1. General Conditions of Contract
They are standard terms that suit the majority of projects; they include:
Definition of the project
Rights and responsibilities for the owner and the contractor
Warranty and delay penalty
2. Special Conditions of Contract
They are the modifications required to suit the uniqueness of the project, make the contract flexible for the nature of the project, and achieve project objectives.
Selection of Type of Construction Contracts
One of the characteristics of construction projects is uniqueness. Every project has its particular circumstances, so it’s crucial to select the contract type which suits the project. The owner develops the process of selecting the type of contract.
Types of Construction Contracts
There are many types of contracts used in construction. Each type has its advantages and disadvantages concerning the owner and the contractor. They are categorized into two major groups as per the method of payment to the contractor. The following are the types of construction contracts generally used in construction projects:
Unit price contract
Target cost contract
Price-based Construction Contracts
1. Lump-Sum Construction Contract
In this type, the contractor bids a single fixed price for overall activities in the project scope. The contractor is responsible for estimating project costs from drawings then adds overhead and his profit to determine the value of the project.
All risks are assigned to the contractor, and there isn’t any risk carried by the owner. The contractor has an incentive in this contract as he is rewarded for an early finish, and there is a penalty for a late finish.
This contract is ideal when the project scope is well defined at the design stage because there is limited flexibility for modifying the design during the construction period.
2. Unit Price Construction Contract
The total price of the project in the unit price contract is based on the price of each item’s unit. The contractor is paid as per the rates of items specified in the bill of quantity.
The risk is shared with the contractor and the owner. This type of contract has more flexibility for design changes than the lump sum contract.
The construction of the project can be started before finishing the designs, so the total cost of the project will be uncertain at the early stages of the project.
Cost-based Construction Contracts
3. Cost Plus Construction Contract
The contractor is paid based on the actual cost of the project, including direct and indirect costs, plus a specific fee. This fee could be a fixed fee or percentage of costs.
All risks are assigned to the owner, and he gets involved with the contractor in the management of the project. The contractor has no risk in case of increasing the cost of the project; also, there isn’t any incentive for an early finish.
This type of contract is ideal when the project scope is uncertain in the early stages of the project. The contractor can start the execution of the project before finishing the design. It is impossible to estimate the cost of the project before the construction has been completed.
4. Target Cost Construction Contract
Target cost contract has common features of the lump sum and cost-plus contracts. The contractor is paid based on the actual costs plus a certain fee either fixed or percentage of total cost in case of the cost of the project doesn’t exceed certain target cost specified by the owner.
There is a risk carried by the contractor in case of an increase in the cost of construction projects. The contractor is also rewarded a percentage of any savings between target and actual cost.