What Types of Contracts Are Commonly Used for Projects

A construction contract provides for a legally binding agreement for the owner and builder whereby the executed contract receives the specific amount of compensation or how the compensation is distributed. There are different types of construction contracts used in the industry, but there are certain types of construction contracts that are preferred by construction professionals. Understanding the different types of construction contracts will help you decide which type is right for you and your project. In addition to the contract, there are many other moving parts to consider, such as the amount of work you need, the design technology you should consider, and the most important machines you need for the job. Consider implementing value engineering in your next project to weigh cost and material options and ensure you get the best value for money. Take a look at our heavy equipment catalog to see through your rental options. Incentives are sometimes built into these contracts to reward the manufacturer if the order is completed prematurely. These agreements may also include penalties, sometimes referred to as “lump sum damages,” for an order that is executed late. Owners typically use these types of contracts to avoid change orders for additional or open-ended work. While simple contracts should be considered, they don`t have to be explicit contracts to be legally binding. Agreement in a simple contract can also be implied.

The American Institute of Architects (AIA) and ConsensusDocs both create standardized contract documents in a variety of formats, including the types of contracts here. Working with an existing professional contract template can give you peace of mind that many other parts of the construction use the same terms and conditions. In this type of contract, the engineer and/or contractor undertakes to carry out the described and specified project at a fixed price. Also called “Fixed Fee Contract”. Often used in engineering contracts. A flat-rate contract sets a certain price for all the work carried out for the project. These construction contracts are also referred to as “fixed-price contracts” or “agreed-sum contracts”. However, there are a few details about these types of contracts that you should be aware of. First, you need to keep track of all your expenses and be prepared to present them.

This may require additional resources and labor costs on your part. You may also be limited on how much you can spend. Some cost-plus contracts contain clauses with “not to be exceeded” cost amounts. Time and material contracts are also used in situations where it is not possible to estimate the size of the project or when completion requirements are likely to change. Costs plus contracts bear the full risk for the buyer, since the seller is insured of all actual costs plus a certain royalty. The entire responsibility lies with the buyer. These contracts can sometimes also be abused. Since the seller will not care much about cost control, as he is assured of all the actual costs. This forces the buyer to review and micromanage all expenses.

Lump sum contracts, also known as fixed-price contracts, are the most basic type of construction contract. This is because they set a fixed price for all the work done between them. For this reason, lump sum contracts are extremely common in the construction industry. There is a good chance that most contractors have signed several lump sum contracts in the past. In general, this contract is only suitable for construction and supplier projects where the different types of items, but not their number, can be accurately identified in the contract documents. Knowing which contract to use and when is essential to a successful outcome in terms of delivery, customer satisfaction and profit. We`ve simplified things by bringing together the eight most common types of construction contracts and detailing the pros and cons of each. Unit price agreements make it possible to obtain contracts that are easy to understand, but on the entrepreneur`s side, it can be easy for buyers to compare prices with those of their competitors and make them lose business. When it comes to unit price contracts, most of the risk lies with the owner, as he has to reimburse the cost of unexpected units that are added.

However, the transparency they offer is a huge advantage for everyone involved. They are not always suitable for complex projects that require complicated tasks and many different types of materials. They do not incentivize entrepreneurs and can lead to a loss of profit if the initial estimates are not compliant. Time and material contracts are generally preferred if the scope of the project is unclear or has not been defined. The owner and contractor must set an agreed hourly or daily rate, including any additional costs that may arise in the construction process. Bilateral contracts are most often used in sales transactions where one party promises to provide a solution and the other party promises to pay for it. There is a reciprocal relationship here, because the obligation to pay for a solution correlates with the obligation to provide the solution. If the buyer does not pay or if the seller does not deliver, there is a breach of contract. Buyer cost risk of different types of contracts (from highest to lowest): CPPC –> CPFF –>CPAF –> CPIF –>T&M –>FPEPA —> FPIF –> FFPTThe seller`s risk is exactly the opposite of the above order of contract type.

Thus, when negotiating a contract, you should always make sure that both the buyer and seller know and are satisfied with the type of contract and the other terms of the contract in order to get a smooth and successful delivery of the project work. Have fun learning! We wish you the best of luck with your PMP certification®! Unit price contracts are likely to be a different type of contract commonly used by builders and in federal agencies. Unit prices can also be set during the bidding process, as the owner requests certain quantities and prices for a predetermined amount of uniform items. Time and material contracts are very popular types of contracts that are used for regular purchases of standard items. Elements may include increasing the temporary workforce for the project with well-defined skills and expertise. The item also contains standard materials that may be required for consumption in the project. Time and material contracts require the recording of everything that happens on the site, especially the hours worked and the materials used. .