Types of Construction Contracts: What You Need To Know

Types of Construction Contracts What You Need To Know

Construction companies rely on contracts to protect their interests and ensure that work is completed according to plan. Contracts are also important for establishing a clear line of communication between the contractor and client. In order for a contract to be effective, both parties must agree to its terms.

There are a variety of different types of contracts used in the construction industry. Depending on the scope and complexity of the project, it is important to choose the right type of contract that best suits your needs. The most common types of contracts are Fixed-Price Contracts, Progress Payment Contracts, Stipulated Sum Contracts, and Multi-Prime Contracts.

  • Careful consideration should be given to each type of agreement before signing a contract so that all parties involved understand their roles and responsibilities.
  • Working with an experienced construction attorney can help ensure that your contracts are comprehensive, enforceable, and legally binding.

In this article, we’ll discuss the various types of construction contracts that will help you understand which type of contract is right for your project.

10 Most Common Types of Construction Contracts

Construction contracts form the basis for any building project, large or small. It’s important to understand the different types of construction contracts so that you can choose the one that best suits your needs. Here are 10 common types of construction contracts and what you need to know about each.

1. Lump Sum Contract

A Lump Sum Contract, also known as a Stipulated Sum Contract, is an agreement between a contractor and a client to complete all the work stipulated in the contract for a single, predetermined amount. It is one of the most common types of construction contracts and is used when the scope of work is well-defined.

The contractor is expected to complete all the work as outlined in the contract and within specified time frames. If any changes or additions are made to the scope of work, they will need to be addressed separately with extra costs associated.

2. Unit Price Contract

Unit Price Contracts are construction contracts in which the contractor and client agree to a price for each completed unit. This type of agreement is often used when the scope of work is yet to be determined.

The project’s total cost will depend on the number of units required, making it easier to estimate how much work is required before the project begins. With this type of agreement, any changes to the scope of work can be quickly and easily added or removed from the total cost.

3. Cost Plus Contract

A Cost Plus Contract is a type of construction agreement that sets a specific rate for labor and materials and requires the client to pay any additional costs above and beyond the predetermined amount. This type of contract is often used when the exact scope of work is unclear or when there are significant changes expected in the course of a project.

The contractor will typically provide a detailed billing for each expense, and the client is responsible for any additional costs incurred in order to complete the project.

4. Design-Build Contract

A Design-Build Contract is a type of construction contract in which one entity, the design-builder, takes responsibility for both the design and construction of the project.

This type of agreement is used when there is a need for a quick turnaround on projects or when the client needs to add or remove parts from an existing project quickly. With this type of contract, the design-builder is responsible for any changes that need to be made in the course of the project.

5. Time and Materials Contracts

A Time and Materials Contract is an agreement in which the contractor provides labor and materials at an agreed-upon rate. The client is responsible for all costs associated with the project, including any additional expenses if needed.

This type of contract is typically used when significant changes are expected during a project or when it’s unclear exactly how much work needs to be done.

6. Guaranteed Maximum Price (GMP) Contracts

A Guaranteed Maximum Price (GMP) Contract is a type of construction contract in which the contractor agrees to provide materials and labor at an agreed-upon rate, with the promise that their total price will not exceed a predetermined maximum.

This type of contract is often used when there is uncertainty surrounding the scope of work or when numerous changes are expected during the course of the project.

7. Progress Payment Contracts

Progress Payment Contracts, also known as Installment Contracts, are agreements in which the contractor is paid for work completed on a project in regular installments.

This type of contract is often used when the scope of work isn’t clear or when there are significant changes expected during the course of the project.

The client pays only for work that has been completed, giving them more control over the costs associated with the project.

8. Stipulated Sum Contracts

A Stipulated Sum Contract is an agreement in which the contractor agrees to provide a fixed amount of work at a pre-agreed-upon rate.

This type of contract is often used when the scope of the project is well-defined, and there are minimal changes expected during the course of the project.

The contractor is responsible for all costs associated with the project, including any additional material or labor costs.

9. Multi-Prime Contracts

A Multi-Prime Contract is a type of construction contract in which multiple contractors are hired for different portions of the project.

This type of agreement is often used when the scope of work is complex or when there are numerous changes expected during the course of the project.

With this type of contract, each contractor is responsible for their portion of the work, and the client pays each one separately.

10. Performance Bonds and Payment Bonds

Performance bonds and payment bonds are essential components of any construction contract, providing financial security for the contractor and the client in case one party fails to meet the agreed-upon terms.

Performance bonds ensure that the contractor will complete the job to the specified standard. In contrast, payment bonds guarantee that subcontractors and suppliers will be paid in full if the contractor does not reimburse them.

These bonds are typically issued by an insurance company or bonding agency and must be in place before any work begins on a project.

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