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The Primary Categories of Contracts in Commercial Construction

The Primary Categories of Contracts in Commercial Construction

The commercial construction industry relies heavily on formal agreements to safeguard both parties involved in a project: the construction company and the property owner. The agreements, commonly known as construction contracts, outline the terms and conditions of the project, providing legal protection and clarity. Understanding the various types of construction contracts common in the industry is important in managing construction projects. Below, we outline the five main types of commercial construction contracts that are commonly utilized across the construction sector. 

What Is a Construction Contract? 

A typical construction agreement serves as a pact among various parties, notably a landowner and a builder, delineating the project’s extent, payment agreements, and safeguarding measures against unexpected breaches and setbacks during the project. 

To ensure an agreement, a fundamental contract ought to comprise the ensuing components: 

  1. Project Overview/Extent: A concise depiction of the project’s challenges to be tackled throughout its duration, containing a synopsis of its purpose (e.g., refurbishing antiquated venues, reinforcing structures following damage).
  1. Contractual Cost: Outlines the total anticipated project cost along with additional payments and potential deductions due to unforeseen events.
  1. Payment Arrangement: A structured plan delineating payment terms, due dates, penalties for delayed payments, and procedures for invoicing.
  1. Inventory of Project Records: A compilation of project documents featuring blueprints, specifications, exhibits, and other relevant materials essential for project management.
  1. Duties of Contractor and Property Owner/Construction Regulations: Clarification regarding the anticipated responsibilities of each party, such as document provision, information dissemination, and delineation of terms related to liens, claims, and disputes.

In the event a contractor or property owner neglects to draft a proficient contract, one or both parties may encounter legal charges, rendering them devoid of protection against dispute. Hence, contracts prove indispensable for both parties involved in the construction process. 

Exploring the Various Contracts in Commercial Construction 

Beyond the customary contractor agreement lies a plethora of contract options dedicated to specific projects, as opposed to a generic contract intended for all project scenarios. 

Just as buildings vary in design and purpose, construction projects also differ in complexity and scope. Each project is unique, varying in structure, location, size, and anticipated usage.

Let’s go through five distinct contract types available for construction projects, examining the advantages and drawbacks of each.

Time and Materials Contract

Contracting based on time and materials offers remarkable flexibility within the construction sector. Termed as such due to its reliance on projected labor hours and material expenses, this agreement adapts to the evolving needs of each project. Unlike fixed-price contracts, which demand precise project specifications from the outset, time and materials contracts accommodate the inherent variability of construction endeavors.

These contracts prove particularly advantageous for projects lacking clear scopes or anticipating future modifications unforeseeable at project initiation. By operating as dynamic frameworks, they allow for real-time adjustments to reflect the evolving demands of the project.

In essence, a time and materials contract functions as an ongoing record, tracking both labor inputs and material expenditures as the project progresses. This approach empowers contractors and property owners to integrate additional costs seamlessly, ensuring that the final agreement aligns with the most accurate project cost assessment possible.

Lump Sum Contract

Contracting through a lump sum agreement stands as the foundational method in project dealings. Unlike other contract forms mentioned here, it presents a broad approach. 

These contracts encapsulate the entirety of a project, covering all its subtasks. The computation involves estimating each task separately, utilizing various estimation techniques and tools. Such a contract proves advantageous for projects with clear and straightforward scopes, where alterations during the project’s course are minimal.

Fixed Price Contract

Contract fixed pricing operates similarly to lump sum agreements, wherein a singular amount is designated to cover the entire project scope. Nevertheless, fixed-price contracts come with specific conditions that may pose significant risks for contractors or property owners in certain scenarios.

For instance, if a contractor formulates a straightforward fixed-price agreement grounded on prior projects and accurate estimating standards, any substantial alteration in the sum later could result in either the property owner bearing additional costs or the contractor receiving less compensation than warranted. Given the contractual obligations, the total amount remains unalterable.

Cost Plus Contract

In contrast to fixed contracts, cost plus contracts operate differently. They aim to reimburse the contractor for both material and labor expenses, along with an extra profit margin added to the total cost. This additional profit is typically determined by a mutually agreed percentage, established beforehand by the construction company.

Yet, there is a caveat for the contractor under this arrangement. Cost plus contracts mandate that contractors furnish the property owner with detailed documentation of every expense incurred to ensure rightful reimbursement. Essentially, for this contract type to be advantageous, contractors must maintain thorough records of their expenditures.

Unit Price Contract

Unit price contracts are ideal for projects where tasks are easily quantifiable and can be priced based on quantity, whether it’s time or volume, outlined in a comprehensive chart. These contracts cover labor, materials, laborer profits, and equipment expenses.

This contract type is most suitable for smaller-scale construction tasks, subprojects within larger ventures, or projects with repetitive, easily quantifiable steps, such as measuring square footage or distance. For example, a tile contractor may opt for a unit price contract, as they can accurately estimate tile usage, measure floor areas, and consistently employ the same materials.

The advantage of unit price contracts lies in their flexibility, allowing contractors to develop contracts for each subcontractor involved in the project. However, crafting such contracts can be laborious and time-consuming, requiring detailing of every aspect and component, including precise payment terms for each task completed.

The Difference Between Design-Build and Building Contracts

Distinguishing between a design-build contract and a conventional building contract boils down to the preferences of the property owner and their inclination towards dealing with multiple entities.

A property owner faces the decision of whether to engage a separate building design firm and building contractors or to opt for a unified approach within a single entity. This choice presents two options:

– Design-Build Contract

In this scenario, the property owner opts to entrust a single company with both the design and construction/renovation aspects of their project. Consequently, a solitary contract addresses the designer, the contractor, and the property owner, binding them together in terms of legalities and dispute resolution.

– Traditional Construction Contract

Contrarily, the property owner may choose to engage distinct entities for the design and construction phases of their project. This results in the formulation of two distinct contracts: one between the designer and property owner, and another between the contractor and property owner. Notably, the designer and contractor bear no mutual obligations, given the absence of a binding contract, allowing them to sever ties at their discretion. 

Employing a generic contract across various commercial projects entails the risk of insufficient specificity tailored to the unique requirements of each project. Consequently, refining the contract to delineate the scope of work, the anticipated challenges to be addressed by the contractor, and establishing clear timelines and legal parameters can prove advantageous for both the client and the project manager. A comprehensive contract minimizes ambiguity and potential disputes, fostering smoother project execution and client-contractor interactions in the long haul. 

FAQs

  1. What is a design-build contract?

A design-build contract involves hiring one company to handle both the design and construction aspects of a project. This streamlined approach eliminates the need for separate contracts with designers and builders.

  1. What is a traditional construction contract?

In a traditional construction contract, the property owner engages separate entities for design and construction. This results in two distinct contracts, one for design services and another for construction, potentially leading to less integrated project management. 

  1. How do I choose between design-build and traditional contracts? 

Consider project complexity, timeline, and preferred involvement level. Design-build offers convenience with one entity handling both design and construction, while traditional contracts provide more control by engaging separate entities. Assess your needs and consult professionals for guidance.

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