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Types of Construction Contracts

The document discusses three main types of construction contracts: 1) Lump sum or fixed price contracts involve an agreed upon total price for all construction work. They transfer risk to the contractor but may involve hidden costs. 2) Cost plus contracts involve paying the contractor's actual costs plus an agreed percentage for overhead and profit. They provide less risk for contractors but require more supervision. 3) Time and material contracts set hourly or daily rates for work when the scope is unclear. They also require establishing direct, indirect, markup and overhead costs. Unit pricing contracts similarly set pre-determined prices for work units that can adjust for scope changes.

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163 views

Types of Construction Contracts

The document discusses three main types of construction contracts: 1) Lump sum or fixed price contracts involve an agreed upon total price for all construction work. They transfer risk to the contractor but may involve hidden costs. 2) Cost plus contracts involve paying the contractor's actual costs plus an agreed percentage for overhead and profit. They provide less risk for contractors but require more supervision. 3) Time and material contracts set hourly or daily rates for work when the scope is unclear. They also require establishing direct, indirect, markup and overhead costs. Unit pricing contracts similarly set pre-determined prices for work units that can adjust for scope changes.

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deepshikha
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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TYPES OF CONSTRUCTION CONTRACTS

ARD 512: PROFESSIONAL PRACTICE & ETHICS

ASSIGNMENT
Submitted by:

15621,15626,15632,15635
15626, 15632, 15635

Submitted to:

Dr. Amanjeet Kaur

DEPARTMENT OF ARCHITECTURE
NATIONAL INSTITUTE OF TECHNOLOGY
HAMIRPUR, HIMACHAL PRADESH-177005
1. Lump Sum or Fixed Price Contract Type: This type of contract involves
a total fixed priced for all construction-related activities. Lump sum
contracts can include incentives or benefits for early termination, or can
also have penalties, called liquidated damages, for a late termination.
Lump Sum contracts are preferred when a clear scope and a defined
schedule has been reviewed and agreed upon.

This contract shall be used when the risk needs to be transferred to the builder
and the owner wants to avoid change orders for unspecified work. However, a
contractor must also include some percentage cost associated with carrying that
risk. These costs will be hidden in the fixed price. On a lump sum contract, it is
harder to get credit back for work not completed, so consider that when analyzing
your options.
1. Cost Plus Contracts:

This type of contract involves payment of the actual costs, purchases or other
expenses generated directly from the construction activity. Cost Plus contracts
must contain specific information about a certain pre-negotiated amount (some
percentage of the material and labor cost) covering contractor’s overhead and
profit. Costs must be detailed and should be classified as direct or indirect costs.
There are multiple variations of Cost Plus contracts and the most common are:

 Cost Plus Fixed Percentage


 Cost Plus Fixed Fee
 Cost Plus with Guaranteed Maximum Price Contract
 Cost Plus with Guaranteed Maximum Price and Bonus Contract

Cost plus contracts are used when the scope has not been clearly defined and it
is the owner responsibility to establish some limits on how much the contractor
will be billing. When some of the aforementioned options are used, those
incentives will serve to protect the owner's interest and avoid being charged for
unnecessary changes. Be aware that cost-plus contracts are difficult or harder to
track and more supervision will be needed, normally do not put a lot of risk in the
contractor.

2. Time and Material Contracts When Scope is Not Clear:

Time and material contracts are usually preferred if the project scope is not clear,
or has not been defined. The owner and the contractor must establish an agreed
hourly or daily rate, including additional expenses that could arise in the
construction process.

The costs must be classified as direct, indirect, markup, and overhead and
should be included in the contract. Sometimes the owner might want to establish
a cap or specific project duration to the contractor that must be met, in order to
have the owner’s risk minimized. These contracts are useful for small scopes or
when you can make a realistic guess on how long it will take to complete the
scope.
3. Unit Pricing Contracts:

Unit pricing contracts is probably another 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 specific quantities and pricing for a pre-
determined amount of unitized items.

By providing unit prices, the owner can easily verify that he's being charged with
un-inflated prices for goods or services being acquired. Unit price can easily be
adjusted up and/or down during scope changes, making it easier for the owner
and the builder to reach into agreements during change orders.

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