Construction contracts try to do the impossible, reduce risks in construction projects while protecting multiple parties from legal jeopardy. Many projects pit participants against one another, creating an environment of distrust and suspicion. Such practices lead to more cases where parties need legal protection. Often, though, when they turn to their contracts for help, they find they’ve signed away the very rights they need.
Many construction projects today are turning to the types of construction contracts that encourage collaboration. These contract types help relieve distrust and suspicion so participants focus on what’s best for the project. They also help allocate project risks and rewards equally.
Whether you are a contractor, owner or subcontractor, the knowledge of different types of construction contracts will help you choose the best one for each project type. After signing, it will also help with construction contract management.
1. Stipulated Lump Sum Contracts
These contracts are the traditional workhorses of the industry. They fit extremely well with design-bid-build projects where the owner wants a set price. Stipulated lump sum contracts assume the owner will hire their own design professionals. So, a contractor’s design work must be covered by a separate contract and protected by insurance coverage. You will often see these contracts on competitive bid or negotiated lump sum projects.
The short form of this contract type fits well with small residential and commercial projects with limited participants and the duration of six months or less. However, a longer project with low complexity might also use these short form contracts.
2. Time & Materials Construction Contracts
Time and materials construction contracts come in handy when you don’t know part of the project’s scope. For instance, there might be hidden items to reveal before you can see how to proceed. The work of revealing the items and planning a strategy for dealing with them would make good candidates for a time and material construction contract. This might be a wall with hidden utilities or a foundation corner that sits over a suspected chemical waste pit.
The key to avoiding disputes with these contracts is to make sure they go into details. They should be very specific about the work, clear on what makes up the labor charge and clear on what makes up the materials charges. For example, does the hourly labor charge include taxes? Are there tool and equipment charges? Who pays for rework? Spell out absolutely everything and have both parties do a thorough review.
3. Cost-Plus Construction Contracts
Cost-plus construction contracts come in three flavors, and they are generally called negotiated contracts. Here, the owner selects the contractor, instead of putting the project out to bid, and the two work out the contract terms. The owner pays the contractor for the project costs plus a fee. These contracts are popular for design-bid-build where the owner already has a relationship with a design or engineering professional. Either the owner, or the design pro, might work directly with the contractor.
Cost-Plus Fee with Guaranteed Maximum Construction Contracts
This contract gives the owner some security about the project’s final cost by stipulating a maximum cost. If the designers factor in all the variables and render accurate plans before the contractor does the estimate, then the project could cost below the maximum.
Cost-Plus Fee without Guaranteed Maximum Construction Contracts
This contract doesn’t have a set maximum so everyone is working on a time and materials basis. The difference here between a time and materials contract is that it covers an entire project instead of a portion of a project. The other difference is that it includes design professionals.
Cost-Plus Short Form
The short form of the construction cost-plus contract can occur with or without a guaranteed maximum. This is usually for minimally complex projects of short duration.
4. Unit Pricing Construction Contracts
Unit pricing construction contracts work best with specific deliverables, like loads of gravel, or a subset of a specialty contractor’s deliverables. They rarely cover a complete project.
5. Public-Private Construction Contract
Governments are always searching for ways to minimize risk of cost overruns in construction projects. More recently, they have also become interested in off-loading the management of infrastructure to private parties.
This is where the P3 contract type comes in. It stands for Public Private Partnership and requires the contractor to own the project before, during and after construction. You typically see these contracts used for toll roads, public transit and other public projects that charge user fees.
6. Construction/Program Manager as Advisor/At-Risk Construction Contracts
You’ll find various types of these construction contracts. Sometimes, the owner hires a construction manager to work with the contractor and designer. Alternatively, the owner may hire the contractor as a construction manager who does the build for a fixed sum, or on a cost-plus fee basis, with or without a guaranteed maximum.
Other contracts might pay the contractor for cost of work plus a fee for pre-construction services. There are several ways to structure these contracts because when using them owners are trying to adapt a contract to unique conditions. For example, owners might use them when they and a contractor have a long-standing relationship, or where the owner needs a contractor with specialized skills and experience.
7. Specialty Contractor Construction Contracts
Every general contractor regularly hires subcontractors. Specialty contractors handle specialized areas of projects like the plumbing, electrical and interior finishes. The GC has a contract with each specialty contractor. The contracts cover the specifics of the work and the details of how the GC and the specialty contractor communicate, work together and handle payments.
These types of construction contracts are highly variable because the trade portion of project work is highly variable. General contractors must consider project demands against the unique aspects of each specialty requirement and offer subcontracts covering work details.
8. Specialty Contracts
Construction contracts must fit the project and fit the participants. So, there is a lot of variability in them. Integrated Project Delivery contracts and Design-Build contracts are increasingly used. They represent a different way of thinking about construction projects.
Instead of each participant working totally in their own interests, these contracts focus on collaboration and assigning risk according to the ability of each party to handle the risk. Expect to see more variations of these contracts as building information modeling, 3D structural printing, and other new technologies increase the demand for different ways of handling risk and reward.
The American Association of Architects and ConsensusDocs offer boilerplate contracts you can adapt to your projects. While many of the basic aspects of the contracts are similar, there are some very distinct differences in content and intent.
When choosing a contract, regardless of the scope and size of your project, it’s wise to seek legal advice.
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