Major Types of Construction Contracts

Whether you are a homeowner hiring a contractor or a construction worker looking to begin working on a project, it is always essential to sign a construction contract. The contract is a legal agreement that both parties will adhere to the stated terms and provisions for the project. Nevertheless, there are various kinds of construction contracts used in the construction industry. The following are the main types of construction contracts. 

Lump-Sum Construction Contract 

This is a type of contract whereby the contractor issues a single fixed price for all the works described by the property owner. The contractor estimates the costs of the project then, includes miscellaneous expenditure and his profits to set the project pricing. Here, the contractor bears all the risks. It is usually ideal for projects with pre-determined designs that will not require major modifications during construction. 

Unit Price Construction Contract 

The total unit price of a project depends on the prices of every item-unit included in the work description. The payments to the contractor are determined by the pricing of the items covered in the scope of the work. In this kind of construction contract, both parties share the risks. Besides, it offers more flexibility for changing the designs during construction works. 

Target Cost Construction Contract 

Here, the contractor is paid depending on the actual costs of the project with a certain additional amount or a specified percentage of the total costs if the overall project costs do not exceed the targets set by the property owner. In case the expected costs of construction increase, the contractor carries the risks. On the other hand, the contractor is entitled to a reward of any savings from the set targets and actual costs. 

Cost Plus Construction Contract 

With this contract, the contractor is paid based on the actual project costs, including both direct and indirect costs, and a specified fee. The fee could be a fixed amount or a percentage of the actual costs. The contract gives the homeowner and contractor shared responsibilities in the management of the project. But, the owner bears all the risks involved. 

Although all the above types of construction contracts are recommended for undertaking construction projects, each has unique benefits and disadvantages that both property owners and contractors should know beforehand.