The construction sector is ever-changing now. Many new tech solutions hit the market and transform this industry. But some concepts and baselines stay the same. For example, types of construction contracts stay almost unchangeable today. Most contracts can choose one of these agreements to run their businesses in the building niche. But it is critically important to protect all the rights when it comes to stakeholders and clients who order the project performance.
When digital transformations are on trend, some general contractors forget about contracting responsibilities. Their essential duty is to run paperwork risk-free and demonstrate their responsible attitude to each agreement signed with any party. So, when you think of high-grade digital tools like construction quoting or cloud-based programs for automated data processing and sharing, remember about corporate policies in the context of contracts.
What Are Construction Contracts?
Construction contracts are a matter of parties’ agreement concerning all the conditions of the project. It means that all the schedules, pricing, and other terms are discussed, approved, and agreed upon by all the stakeholders and other representatives of the tendering and contracting processes. This way a solidified deal is made between all the members of your contract (clients, partners, investors, other stakeholders, subs, suppliers, etc.).
The most detailed information about the peculiarities of each construction agreement it is possible to get while having an idea of which type of contracting you need for your business. That is why it is better to explore all possible variants of contracts first.
4 Types of Contracts in Construction to Take into Account
Remember that the most important agreement you sign is with the project owner (publisher). It means that most construction contracts are presented for two parties – the customer and the general contractor. Other agreements come then. First, you need to establish great relationships with the owner while making a solidified deal between both parties (a consumer and a contractor).
But what type of contracting to choose? Let’s take a closer look at the most common types of construction contracts and review their pros and cons for present-day contractors and clients. This way you will be able to pick sides faster and almost risk-free for your business.
1 – Unit Price Contracting
This is one of the most widespread contract forms in the present-day construction sector. There is a total price that is the baseline of the project. The bill of quantity is a matter of the consumer’s payments for each listed item required for the order performed by the contractor. All the rates are seen by the owner – they are presented by the general contractor. The advantage of this contracting type is its rather flexible design. It is possible to change some modeling plans and undertake corrections to overall costs. It is possible to start the project even if the final price is unknown.
But be ready for rather complicated project peculiarities in the context of high-volume tasks and ever-changing showings hard to report and manage if the owner would like to correct some designs. In general, this type of contract is rather safe and makes both parties equal in rights. The bidding process is usually fast and hassle-free. Especially, if the contractor opts for qualitative construction bidding software.
2 – Lump Sum Contracting
This type of contract is also price-based. But it is based on fixed costing for each project item. Speaking about the positive properties of this agreement, it is a transparent and fast costing process. But it is worth noting that almost all the risks regarding profit margins are the responsibility of the contractor. If poor estimating and budget planning take place, you cannot change anything in the fixed pricing approved in the contract.
3 – Cost-Plus Contracting
It is a so-called hybrid agreement preferred by many nowadays contractors. All the specifications together with schedules and costs are discussed. This way risks are equal for both parties. But the owner assumes riskier situations. Among the benefits, the cost-plus contracts bring are fixed but discussable percentage rates, fees, GMP showings, and other parameters. Speaking about weak spots, there are challenges with the final estimates of the project.
4 – Target-Cost Contracting
Finally, the fourth type of construction contracting is about target costs. This agreement combines approaches of the lump sum and cost-plus contracts. It means that the cons and pros of these contract types are blended here as well. From the first side, target-cost agreements are about shared risks for the owner of the project and the contractor. The mutual decision is based on early costing and budget planning.
On the other side, this contract is about limited flexibility factors. It takes more time to discuss everything and negotiate all the conditions to take into consideration. But usually, projects do not go over the budget with multi-level negotiations and several approval stages of costing and prices.
