Under an additional cost contract, contractors are paid for all of their construction-related expenses. That's part of the cost of the name. Costs can include direct costs such as labor, materials, supplies, etc. They also include general expenses, such as insurance, mileage, and a portion of the office rent.
In addition, they also receive an agreed amount in exchange for the profits. That's the “plus”. However, we must take into account some details about this type of contract. First, you'll need to keep track of all your expenses and be prepared to present them.
That may require additional resources and labor costs on your part. You may also be limited in how much you can spend. Some contracts with additional costs include clauses stating that they “must not exceed the amounts of costs”. Like the higher-cost contract, this agreement requires careful review and analysis of expenses.
This can be time consuming for large, multi-phase projects. It also places most of the risks on the contractor. If the original estimate ends up being lower than the final costs, the contractor may lose money on the project. The five main types of construction contracts are lump sum, time and materials, additional cost, unit price, and maximum guaranteed price (GMP).
Because there are so many different types of construction projects, each type of construction contract exists to meet the different needs of all parties involved. However, construction projects vary greatly in terms of complexity and size, so there is no one-size-fits-all approach to construction contracts. This is why several types of construction contracts have been developed over time, such as flat-rate contracts, material contracts (TM) with a percentage of time of 26% and unit price contracts. Because construction projects take many forms, different projects require contracts with different characteristics.
All types of construction contracts define a schedule, budget, quality requirements and other aspects that must be defined in each construction project. The two main differences between these types of construction contracts are the way in which the disbursement will be made and the risks and rewards that each party assumes. A flat-rate contract (also called a fixed price contract) indicates the total price of all work. This price includes all time and materials, regardless of changes or problems.
This type of contract protects homeowners against unforeseen changes and setbacks. Flat-rate contracts may seem to favor the owner over the contractor, but there are ways to balance the balance. Many contractors charge an additional percentage for signing flat-rate contracts, as they will be at greater risk. In addition, landlords often establish incentive programs to reward work that is completed early.
An additional cost contract is used when the costs of the construction project are uncertain. While this may seem like a disadvantage, contracts with additional costs often include incentives for not exceeding the budget and set limits on spending. This avoids conflicts and ensures that contractors are paid fairly. A time and materials contract is a good option for small projects, as they require close supervision.
For example, all costs must be carefully monitored and classified to document them and ensure that contracts are enforced. As you can imagine, this gets more and more difficult the bigger the project. The advantage of choosing a time and materials contract is that it protects homeowners from overpaying contractors. A unit price contract is used when an owner wants to buy a large quantity of a certain product.
Each product is a unit and costs a fixed price. These items are also often charged in large quantities for a reduced price. Unit price contracts are advantageous when the owner knows exactly how much of a specific product he needs. Using this type of contract and buying all the units at once is also a good way to protect against possible future inflation in material prices.
By purchasing all the items at once, owners often pay less than they would in the future and don't have to worry about drafting future contracts. Cost contracts plus contracts are used when the scope has not been clearly defined and it is the owner's responsibility to set some limits on the amount that the contractor will invoice. When some of the options mentioned above are used, these incentives will serve to protect the owner's interests and avoid being charged for unnecessary changes. Keep in mind that cost plus contracts are difficult or more difficult to track and more oversight will be needed.
This type of construction contract allows for greater communication between the designer and the construction team and accelerates the bidding and construction process. By including information about communication and changes, construction contracts streamline the decision-making process. This process saves the owner time and money by combining the delivery of the design and construction project into a single contract. General contractors can easily create estimates using construction estimation software such as ProjectManager or hire a specialized construction estimator to create realistic and cost-effective estimates.
Construction projects have countless moving parts, involving many people and many different contractors. They're not always a good fit for complex projects that require complicated tasks and many different types of materials. In simple terms, construction contracts are legally binding agreements that explain the work that a general contractor will perform and the payment that will be made by the project owner. Now that you know the most common types of construction contracts, learn how to manage construction costs with precision.
Considering the unpredictable nature of any given construction project, the owner assumes significant risk with time and material contracts. Under a construction contract with incentives, the project owner and the contractor agree to an additional payment rate that is awarded to the contractor based on whether the project is delivered on time and under budget. The purpose of a construction contract is to detail the exact terms of the agreement between a landlord and a builder, and there should be no room for interpretation. The owner and contractor must set an agreed hourly or daily rate, including any additional expenses that may arise in the construction process.
Lump-sum contracts, also known as fixed-price contracts, are the most basic type of construction contracts. .