A formal contract between the two parties is always required to guarantee legal protection in any construction project, regardless of the construction business involved or the property owner’s identity. A conventional construction contract is an agreement between many parties, mostly a property owner and a contractor, that specifies the job’s parameters, payment terms, expectations and safeguards against unforeseen lapses in performance.
In addition to the basic contractor agreement, there are several more contracts tailored to particular projects as opposed to a “blanket” agreement that covers all project types. Just as not all structures are built in the same manner, not all construction jobs are made similarly. Every building is made to meet a certain set of requirements, from diverse shapes and locations to various square footage and foot traffic estimates.
Here are the five possible forms of commercial building contracts, together with the advantages and disadvantages of each.
- Unit Price Agreement
Contracts with unit prices are used for occupations where the tasks and work can readily be counted, measured, and priced according to quantity (either time or money) in a line chart. The equipment, labor, and supplies cost can be included in each unit pricing line. A smaller construction project, a subset of a larger project, or a task where the stages are repeated and easily measured, such as square footage or distance, are the greatest candidates for unit pricing contracts. For instance, a tile worker may employ a unit pricing contract since they can measure the square footage of a floor, know precisely how much time would be required, and use the same supplies each time they lay tile. Unit pricing contracts have the advantage that contractors may create unique contracts for each construction trade subcontractor engaged in a project.
This contract takes a long time to draft since a contractor must identify every detail and component of a job and the same compensation for the work done.
- lump sum Agreement
The first kind of contracts utilized for construction projects were lump sum agreements. Compared to the other contracts discussed in this article, they are considered more of a blanket sort. Lump sum contracts are calculated using estimating tools and procedures to estimate each work individually. They cover the full project, including subset jobs. This kind of contract works well for building projects with clear scope definitions and a few scope adjustments anticipated during the project.
- Fixed Price Agreement
As the contracts are written with a single amount covering the project scope, fixed-price contracts are similar to lump-sum contracts. There are a few conditions to the fixed contract, though; in some cases, they can be quite harmful to property owners or contractors. For instance, if a contractor creates a fair, fixed-price contract based on his prior work and good estimating rules, the final amount changes significantly. The property owner will pay more, or the contractor will receive less than fair compensation. The entire amount cannot be modified since a contract binds them.
- Contract for Time and Materials
A time and materials agreement is one of the construction industry’s most flexible contracts. Hence, the phrase “time and materials contract” is based on the projected number of hours a worker would work on a project and the estimated cost of the materials. Time and materials contracts can be modified to meet the final project end so that the necessary payment will be administered correctly. This is possible since most construction tasks differ in duration, the quantity of material consumption, and waste accounting. Time and materials agreements are excellent for long-term projects where the project scope is not well specified or where it is possible that future additions will be required but are not known at the outset of the project. A time and materials agreement functions essentially as an ongoing, unfinished list for recording labor hours and supplies. Using this contract, building professionals or property owners may include any additional expense with the project and at any point during the construction or remodeling process, guaranteeing the final agreement has the most amount imaginable.
Fixed contracts’ complete opposite is a cost-plus agreement. They are created to compensate the contractor for the cost of materials and labor and an additional profit on top of the total cost. This extra profit is often calculated using a percentage predetermined by a construction business and agreed upon by the parties. However, there is a catch for the contractor in this scenario. According to the terms of a cost-plus contract, contractors must give the property owner written documentation of all charges to be properly reimbursed. For this form of contract to be advantageous to the contractor, their bookkeeping must be extremely well-organized.
In conclusion, when handing out a construction project, ensure you know the contract your constructors and you sign.