There are many different contract types that are used for construction projects and other similar endeavors. These different contract types are usually based on the manner in which payments are made, as well as the motivations behind the contractor’s payments.
Some common contract types for construction and other projects may include:
- Unit Price contracts: These agreements involve individual payments based on the number of units that are constructed at the end of the project. For example, the contractor may be paid per house that is constructed in a new neighborhood.
- Lump Sum contracts: Also called fixed-fee or fixed-price contracts, these contracts allow the contractor to be paid a lump total sum for completing the entire project. Instead of being paid for each individual unit, the buyer and the contractor agree on a set price for the entirety of the project (often times the contractor doesn’t need to provide a breakdown of expenses).
- Cost-Plus contracts: These are where the contractor is for the cost of the project, plus an additional fee for their services.
- Incentive contracts: This is where the contract is paid extra if they are able to meet various project goals (such as finishing construction before a deadline).
- Fee Percentage contracts: This is where the contractor is paid based on a percentage of the project costs. Common for engineering-based projects.
There are many other different types of contracts; however, these are the most common contract types for contractors and engineers. The laws governing construction contracts may vary from state to state.
This depends mainly on the ability to foresee and predict costs, including any potential variations in cost. Fluctuations in project costs usually have to do with market conditions involving inflation, as well as any other increases/decreases in values.
For example, if the overall cost of a project is relatively easy to calculate, the parties may choose to use a lump sum (fixed-fee) contract. Since there will be little changes in costs during the project, the parties may feel comfortable enough to charge a fixed fee for the entire project.
In contrast, if the parties suspect that there may be many changes in pricing during the project, they may choose to sign a unit-price contract. That way, the contractor gets paid only for the amount of units that they actually complete, which can help reduce risks for both parties.
Incentive contracts can be used in order to stimulate the contractor to perform more rapidly or to complete the project at a high standard of quality. Lastly, cost-plus and percentage contracts may be used when there are unique circumstances to be considered, such as when the contractor is known for their distinct skill or creativity in their field.
If you are unsure of which contract is best for you, it’s helpful to contact a contracts lawyer, who can advise you on the pros and cons of each contract type.
Dealing with different contract types can present many legal challenges to buyers and contractors. It is in your best interest to contact a competent business lawyer for help with contract drafting and review. Your lawyer can ensure that you’re using the best type of contract for your specific needs. Also, in the event that a dispute or lawsuit arises over the contract terms, your attorney will be able to represent you in court.