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Four common types of construction contracts

On Behalf of | Aug 18, 2021 | Construction Law |

Construction contracts form the backbone of any large construction project in Irvine. It is through construction projects that our state’s infrastructure is maintained and improved, adding to our state’s economy and quality of life. Construction contracts also provide the framework for the scope of the project, which property owners, contractors and subcontractors may find valuable. There are four common types of construction contracts.

Type one: lump sum or fixed price contracts

A lump sum or fixed price contract lays out the total cost for the entire construction project. This includes incentives for earlier completion or penalties for late completion. A lump sum contract is a good choice for situations where the parties have a clear idea on the scope of the project and have worked out a schedule that they both agree to.

Type two: cost plus contracts

Cost plus contracts cover the actual payment of costs and expenses derived from the construction project itself. These contracts contain specific terms laying out a percentage of material and labor costs as well as profit. These costs may be direct or indirect. A cost plus contract is a good choice when the scope of the project is outlined but not completed and the property owner wants to place limitations on the contractor’s expenses.

Type three: time and material contracts

If the scope of the project is undefined or unclear, the property owner and contractor may enter a time and material contract. In such contracts, the property owner pays the contractor an agreed-upon hourly or daily rate. This includes costs that come up during the construction process, which could be direct, indirect, markup or overhead costs.

Type four: unit pricing contracts

When a builder is working with a federal agency on a construction project, they may utilize unit pricing contracts. This involves a bidding process where the property owner asks for a specific number of unitized items for a specific price. A benefit of unit pricing contracts is that the property owner can ensure prices are not being inflated, and it is easy to adjust prices as the project evolves.

Choose the right type of contract for your construction project

Contracts can be as simple or complex as you want and can be executed to meet the many needs of your construction project. If all these types of contracts seem confusing, do not worry. With the right help you can choose the type of construction contract that is best for your situation.