There are several types of construction contracts used in the industry. Disbursement method, duration, quality and other specific terms define different types of contracts.
Lump sum contracts include benefits for early termination as well as penalties for missed deadlines. After scope of work as well as working schedule review, this is the preferred contract. This contract shall be used when the risk needs to be transferred to the builder and the owner wants to avoid change orders for unspecified work. On the other hand, this makes it harder to get credit back for work not completed.
This type of contract involves payment of the actual costs, purchases or other expenses generated directly from the construction activity. Cost plus contracts work in cases where the scope is subject to confirmation. As such, it is the owner’s responsibility to establish some limits on how much the contractor bills. The mentioned incentives will thus serve to protect the owner’s interest and avoid charges from unnecessary changes.
Time and Material
Time and material contracts are usually preferred if the project scope is not clear, or has not been defined. The owner and the contractor must establish agreed rates. This includes additional expenses that could arise in the construction process. The costs must be classified and included in the contract.
Unit prices help during the order process as the owner requests specific quantities and pricing for a pre-determined amount of unitized items. By providing unit prices, the owner can easily verify fair prices for goods or services being acquired. Unit prices are easily adjusted up and/or down during scope changes. This makes it easier for the owner and the builder to reach into agreements during change orders.