As a construction professional, you sign a contract for every job – essentially a warranty that your firm will receive a specific amount of compensation from the project owner for the completed project. The contractual agreement defines the terms and method of compensation and states other conditions, such as the duration and quality of the work, job specifications, and so forth.
Construction contracts come in three basic varieties. Here’s a quick rundown:
Lump Sum or Fixed Price Contracts set a total amount for all construction-related activities. These agreements often include incentives or benefits for finishing the job early and penalties (“liquidated damages”) for missing this deadline. Lump Sum contracts are preferred when the parties have set a clear scope and a defined schedule for the job.
Cost Plus Contracts involve payment of costs, purchases, and other expenses of construction They set a pre-negotiated amount (such as a percentage of material and labor costs), factoring in the contractor’s overhead and profit. Costs must be detailed and defined as direct or indirect There are a number of sub-types for these contracts, including: 1) Cost Plus Fixed Percentage; 2) Cost Plus Fixed Fee; 3) Cost Plus with Guaranteed Maximum Price; and 4) Cost Plus with Guaranteed Maximum Price and Bonus.
Time and Material Contracts. These agreements are usually preferable if the scope of the project is unclear. The owner and the contractor agreed on an hourly or daily rate, including additional expenses that might arise. The contract classifies costs as direct, indirect, mark-up, and overhead. Sometimes the owner minimizes its risk by setting a cap or a specific project duration that the contractor must meet.
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