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5 Types of contracts that can be used in construction

Whether you are planning to build a house or take part in constructing a building, there can be a sense of excitement to work on a new construction project. It becomes fulfilling to see it come to life from the planning to the construction phase. But, if you want to successfully make the house or building into a reality, start with a good construction contract.

Construction contracts elaborate what should happen in the construction project. A contract contains the specifics of what should be done and each party’s obligations on it. So it is important that the contract is well constructed to avoid building and contract disputes.

You must also choose a type of construction contract that could fit well for the project. Using the wrong contract type might cause you serious problems as construction goes on. Different types of construction contracts have different setups and different uses. The common ones are Commercial Contracts, Residential Contracts, Subcontract Agreements, Cost Plus Contracts, and Lump Sum Contracts.

1.Residential Contracts

These are the contracts that are necessary when building a house. Since homeowners usually spend a large amount of money in their lifetime for a house, you must do your job well. Also, laws such as the Home Building Act protects their right to have a decent house, so you are obligated to give them the house worth every dollar spent.

This includes their right to transact with licenced builders, have insurance, and have the necessary warranties when building defects arise. Not being able to fulfill these have some legal consequences, so it is necessary to make the residential contract as law-compliant as possible.

2.Commercial Contracts

These are the contracts used for building commercial establishments. Since these buildings that are for non-residential use, these should be done with extra care. Your client’s business is at stake here, especially when they are business owners. This includes building office spaces, shops, hotels, and other businesses that may need space for their business to thrive more.

Usually, commercial contracts are not that different from residential contracts. But you may need to secure additional permits and other documents, depending on relevant zoning and other construction laws. Make sure to comply with these laws in making the commercial contract since it may cause you some serious problems if you fail to do so.

3. Subcontract Agreements

This agreement is made especially for the subbies out there. This lists down what should the subcontractor do for the builder, and how much would they get paid for it. This agreement is necessary to make the subcontractor responsible for their work instead of the head contractor.

This will also make sure that the subcontractor gets compensated for their contribution to the project. So if you are working with subcontractors, this agreement is important to formally acknowledge their work in the construction and get formally paid for it.

If you are their head contractor, you do not become responsible for their failures. They become responsible on their own.

4.Lump Sum Contracts

These are contracts that have a fixed price agreed upon the contractor. This is the most popular type of contract among contractors. This specifically specifies the exact amount needed to work on the project, so you would have an idea to work within a price range.

Since you are working on a budget, it becomes easier to manage and get funds for it. It also follows a stricter time frame, in which contractors get paid in fixed amounts and time periods. But, the home or business owner is more likely to be at an advantage, for they would be not liable for any additional charges.

Yet, the one thing difficult in these contract is when the need to make variations arises. Since everything is laid out in the contract, making changes would require more paperwork to keep them in motion. Thus, making it as tedious process. Also, it is worth taking note that the fixed price might set higher that the actual cost, which could be a difficulty too.

5.Cost Plus Contracts

Cost Plus Contracts are applied to building projects with costs that could not be identified immediately. Since there is no immediate certainty when it comes to the cost (thus being called cost plus), there should be an added profit for the contractor to prevent necessary spending.

The profit that a contractor can get will depend on their progress on the construction project. They can get a certain percentage on every time period that they can get paid. Even it could be hard to determine your budget for these contracts, you can always set a maximum price.

This contract is considered to be the more flexible to change than the Lump Sum contract, but cost plus contracts are more used in research and development industry.

Getting a Contract Lawyer

Whichever contract you may need, Contracts Specialist is sure to help you. They can help you choose the appropriate contract that you can apply to your construction project. Whichever contract you may choose, they are sure to give you expert legal advice on your construction contracts. They can guide you on each type of contract and help you review them so that it becomes a good contract. In doing this you can help yourself in avoiding contract disputes, or any other problems caused by poor planning.

John Dela Cruz is the Principal Lawyer of Contracts Specialist. As a construction lawyer based in Sydney, he gives legal assistance to both builders and contractors on making their Payment Claims and Payment Schedules.


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