Construction contracts are not one-size-fits-all. Beyond various terms to consider, there are different types of contracts. The type of contract can affect pricing, payments, guarantees, expectations, etc.
This post is the second part of a series about types of construction contracts. You can read about the first four types of contracts in part one by clicking here.
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3 Types of Construction Contracts
Guaranteed Maximum Price Contracts
With this type of contract, the builder guarantees a cap on what they can charge the owner. If the project runs over, the contractor covers the additional costs. This type of contract is suitable because it offers flexibility while providing a way to cap expenses.
These contracts incentivize the builder to keep costs low. The owner gets savings if the project comes in under the cap. However, the contract will also offer bonuses to the builder depending on how well they manage costs.
Incentive contracts may offer various bonus structures to motivate the builder. It could be financial bonuses to finish the project on time or early. Some incentive contracts may also focus on cost savings. There will often be incentives for both the timeline and costs.
This type of contract is beneficial to both parties. The builder can increase their profits while the owner can achieve goals like saving money or early completion. On the other hand, these contracts may include penalties for missing milestones. Incentive contracts promote efficiency and accountability.
Cost-Plus Percentage Contracts
The cost-plus percentage contract is a variation of the cost-plus model. With many cost-plus contracts, the builder gets a fixed fee on top of construction costs. Under the percentage-of-cost structure, the builder’s fee is a percentage of the total completion cost.
This structure can provide additional flexibility for a cost-plus project. However, linking builder compensation to a percentage of costs can be an issue. These contracts need a clear scope of work and cost-control measures.
Construction contracts are complex. Determining the right contract type can make a significant difference for property owners. You’ll also need to negotiate the terms of the contract. Property owners should consult lawyers and real estate professionals before signing an agreement.
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