Working in the construction industry means dealing with many types of contracts. While the specifics of these contracts may change every time you come across a new one, there are common types of contracts you will encounter, and it is important to know the benefits and drawbacks of each one.
Lump sum contract
A lump sum, or fixed price, contract, is one of the most common construction contracts. It is exactly what it sounds like: a contract that states what work is to be performed and for what price.
Although a lump sum contract can simply the project, agreeing on a price up front can be risky since you do not know if you will experience any delays or setbacks. You could end up losing money, although you could save it if the project is completed under the contract price.
Unit price contracts
Unit price contracts are different from lump sum contracts because they divide the project up into units and set a price for each unit. A unit price contract can make it easier to understand the total cost, since owners can see the price of each unit.
However, the units required might end up being more than initially anticipated, meaning the owner could end up paying more overall.
Cost-plus contract
A cost-plus contract is a little more complicated. This is a contract that involves an owner paying a contractor for costs during the project, in addition to another agreed upon sum.
This type of contract can be enticing because it offers more flexibility. Owners and contractors can agree on changes to the project, with the contractor feeling secure that they will be paid.
However, there is always the potential for disagreement over “costs” under the contract. Costs can cover direct costs, such as material and labor, or indirect costs, and contractors can find themselves struggling to justify certain costs.
Additionally, since the contractor is getting paid through owner reimbursement, there may be times where the contractor is struggling after spending money on something and waiting for reimbursement.
Help with your construction contracts
There are other common contracts you are likely to deal with in the construction industry, with each type also having its own pros and cons.
An attorney experienced in construction law can help you draft and review all your contracts to make sure you are getting the maximum benefits from each one.
