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Types of Construction Contracts

The contract should protect the rights and concerns of both parties while clearly specifying the scope and limitations of the work to be done. There are several types of contracts and you should choose the one that fits you best.

Cost-Plus Contract

A contract agreement wherein the purchaser agrees to pay the cost of all labor and materials plus an amount for contractor overhead and profit (usually as a percentage of the labor and material cost). The contracts may be specified as

A cost-plus contract is a common inclusion in contractor agreements. This term means the contractor agrees to supply labor and materials for "x" amount of dollars, plus any extras on top of that. This type of agreement leaves the price open to circumstances encountered by the builder.

Contractors prefer this type of bidding because it relieves them of sticking to a set price. Obviously, hauling away dirt, stumps, and other debris is going to cost the contractor more money. However, he passes this cost along to you, the homeowner. This also means he does not have to be as accurate in his initial bid because any extras will be passed directly to you.

A cost-plus is the riskiest type of contract to sign. When working with a fixed budget, this can mean extra costs. If you sign this type of agreement, you have to hope that no unforeseen circumstances are encountered by the contractor. However, in construction, surprises are a part of the business. Construction would not be construction without surprises!

Fixed Price Contract or Lump Sum Contract

The "lump sum" contract gives the general contractor an agreed upon fixed amount over the life of the project. This has the advantage of locking in a given amount, but it might be high to begin with. This works well for simple remodeling projects. The typical contract is the "cost-plus" or "time-and-materials" contract where you pay the contractor the cost for labor and materials plus a percentage (anywhere from 10% to 25%) of that cost.

With this kind of contract the Ccontractor agrees to do the a described and specified project for a fixed price. Also named "Fixed Fee Contract".

A Fixed Fee or Lump Sum Contract is suitable if the scope and schedule of the project are sufficiently defined to allow the Contractor to estimate project costs.

This means the contractor will supply all labor and materials for "x" amount of dollars. If he missed something on the plans and it ends up costing more, he has to absorb the cost. This puts responsibility on the contractor to be thorough in his bidding, because after all, he is in business to make money.

Some homeowners constantly change their minds. This often results in increased labor and materials needed to complete the job. It is not fair to have a contractor provide a quote on one idea, and completely change your mind and expect him to hold the same price. Decide early what you want from the builder and have him quote a fixed price for the work. This will save you time, headaches, and a lot of frustration during your project.

It's customary for the contractor to require a deposit before building begins. The deposit may only cover cost of materials that the contractor has to pre-order, but it is also reasonable to expect to pay anywhere from a quarter to a half of the total price of the job up front.

Unit Price Contract

This kind of contract is based on estimated quantities of items included in the project and their unit prices. The final price of the project is dependent on the quantities needed to carry out the work.

In general this contract is only suitable for construction and supplier projects where the different types of items, but not their numbers, can be accurately identified in the contract documents.

It is not unusual to combine a Unit Price Contract for parts of the project with a Lump Sum Contract or other types of contracts.