Understanding Construction Contracts 

Choosing the right construction contract is just as important as laying a solid foundation. Whether you're a contractor, project manager, client or property developer, understanding the various types of construction contracts is central to a project’s success.

Here, we show you the main contract types used in the UK construction industry to help you understand the different types of building and construction contracts.

Standard Form Contracts

Standard form contracts are pre-established templates widely used in construction. They offer a familiar framework that many in the industry understand and aim to save time while reducing the risk of misunderstandings. There are two main families of standard form contracts:

JCT (Joint Contracts Tribunal) Contracts

JCT contracts are the most commonly used in the UK, especially for building projects. They come in several forms, each designed for different project needs:

Standard building contract. The standard building contract is intended for larger, more complex projects where detailed contract provisions are necessary. It's typically used when the employer provides the design, and the contractor is responsible for carrying out the work.

For example, if you're constructing a large office building with specific architectural designs provided by the client, this contract would be suitable. It allows for clear delineation of responsibilities and risk allocation between the parties involved.

Design and build contract. As the name suggests, a design and build contract is used when the contractor is responsible for both design and construction. It's suitable for projects requiring detailed provisions but where the client wants a single point of responsibility.

This type of contract might be used for a new housing development where the contractor is tasked with both designing and building the homes. It simplifies the process for the client but requires the contractor to have both design and construction capabilities.

Minor works building contract. For smaller, simpler construction projects, the minor works building contract is often the best fit. It's used when the work isn't complex and doesn't require detailed contract provisions.

You might find a minor works and building contract appropriate for something like a small house extension or a simple retail fit-out. It streamlines the contractual process for straightforward projects.

Intermediate building contract. Typically bridges the gap between minor works and standard building contracts, the intermediate building contract is often used for projects up to one million pounds.

An intermediate building contract might be suitable for a medium-sized residential development or a moderately complex commercial renovation. With it, you get more detail than a minor works contract, though it’s not as comprehensive as the standard building contract.

Construction management contract. When a client wants to appoint a construction manager to oversee the project, this is usually the contract of choice. The construction manager coordinates the work of various trade contractors, who are directly contracted to the client.

This type of contract is often used for large, complex projects where the client wants more control and flexibility. For instance, it might be used in the construction of a large shopping centre or a multi-use development.

NEC (New Engineering Contract) Contracts

NEC contracts are more commonly used for engineering projects and public sector work. They can be used internationally and are known for their flexibility. The NEC suite includes several contract options, each designed for different project types and risk allocations.

NEC contracts are often preferred for their clear language and proactive approach to project management. They're designed with good project management practices and collaboration between parties in mind.

You might see a NEC contract used for large infrastructure projects like railways or bridges. They're favoured for their emphasis on early warning systems and collaborative problem-solving, helping to keep complex projects on track.

Other Contract Types

Beyond the standard form contracts, several other types are also used in UK construction:

Lump Sum (Fixed Price) Contracts

Lump sum contracts are also known as fixed price contracts and are the most popular type for building and engineering agreements. In this arrangement, the contractor agrees to a fixed price for the entire project.

They provide cost certainty. However, they require accurate cost estimation by contractors, who bear the risk of cost overruns. Lump sum contracts work well for projects with a well-defined scope and low risk of changes.

For example, a lump sum contract might be used for the construction of a standard office building where the design and specifications are clearly defined from the outset, or where the contractor has built to a similar design in a previous project. 

Cost-plus Contracts

In a cost-plus contract, the owner/client purchases materials and equipment, and the contractor is paid a fixed percentage on top of costs. This type of contract is often used when the owner wants control over material selection or when the project scope is not fully defined at the outset.

Cost-plus contracts provide transparency in project costs and can be beneficial when flexibility is needed. They do, however, require monitoring to prevent cost escalation.

You might see cost-plus contracts used in a high-end residential project where the client wants to select specific materials or in a renovation project where the full scope of work is unclear until work begins.

Time and Materials (T&M) Contracts

In a time and materials contract, the contractor is reimbursed for material costs and paid a fixed wage for labour. It's useful for projects with an uncertain scope.

T&M contracts provide protection for contractors but may limit profit potential. They require careful management and clear communication to prevent cost overruns.

These contracts are often used for maintenance work, emergency repairs or projects where the full scope can't be determined until work is underway. For example, renovating an old building where structural issues may only be discovered once the walls are opened up and require flexibility in the scope of work and budget.

Unit Price Contracts

In a unit price contract, work is divided into fixed-cost units. This type of contract is useful for projects with an uncertain number of repeatable elements. It's also known as measure and pay, measurement, or remeasurement contracts.

Unit price contracts are common in civil engineering projects, such as road construction or pipeline installation, where the quantity of work may vary but the type of work is consistent.

Guaranteed Maximum Price (GMP) Contracts

A guaranteed maximum price contract sets an upper limit for project costs, with the contractor absorbing any additional costs beyond the agreed maximum. You’ll see GMP contracts used for projects with a known scope and challenges.

GMP contracts aim to combine the cost certainty of a lump sum contract with the flexibility of a cost-plus contract. They're often used in commercial construction where the client wants to cap their financial exposure while retaining some flexibility in the project scope.

Integrated Project Delivery (IPD) Contracts

Integrated project delivery is a relatively new approach that involves a multi-party agreement between the design firm, builder and owner. It spreads risk and rewards across all parties and promotes collaboration and innovation.

IPD contracts are gaining popularity for complex projects where early collaboration between all stakeholders can lead to better outcomes. They're often used in healthcare construction or other technically complex buildings.

Choosing the Right Contract

Selecting the appropriate contract type is the starting point for a project’s success. Here are some factors to consider:

●       Project size and complexity: Larger, more complex projects typically require more detailed contracts.

●       Level of design detail available: If the design is complete, a lump sum contract might be suitable. If the design is evolving, a more flexible contract type could be better.

●       Desired risk allocation: Different contract types allocate risk differently between the client and contractor.

●       Project timeline and budget constraints: Some contract types are better suited to fast-track projects or tight budgets.

●       Level of client involvement required: If the client wants to be heavily involved in decision-making throughout the project, certain contract types will be more appropriate.

While certain contract types are more common for specific project types, the choice ultimately depends on the unique requirements of each project. It's always wise to consult with legal and other construction professionals so you're selecting the most appropriate contract for your specific needs.

The Need for Project Management Software

Managing construction contracts is simpler with the right software. These tools help track project progress while handling documents and keeping everyone in the loop. From scheduling to budget tracking, project management software makes contract administration smoother. Look for options that offer features tailored to construction project management and integrate well with your existing systems.

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