Types of construction contracts

7 Types of Construction Contracts Part 1

Construction contracts require attention to detail. Even for a single-family home, there is much to consider with so many different types of construction contracts. Builders and property owners use different deal structures depending on the project’s goals and other factors. This post will explore some of the more common construction contracts.

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4 Common Types of Construction Contracts

Lump Sum Contracts

Lump sum contracts are the most common option in residential construction. Homebuyers favor them because they provide a fixed price from the beginning. With materials and labor all under the fixed price, you don’t have to worry about sudden overruns.

Builders prefer these contracts for projects that are more standard with little variation. The costs are more predictable, and there is a low chance of expenditures exceeding the price. However, the builder assumes some risk since costs could increase.

Design and Build Contracts

With many projects, two different companies handle design and construction. The owner will get plans and then take bids from construction firms. With a design and build contract, the same firm handles both, so the design and construction are under a single contract.

Having one firm handle design and construction streamlines the project. It also offers cost savings since the design and construction teams have a history of collaboration.

Cost Plus Contracts

A cost-plus contract is an agreement where the builder charges the homeowner for construction costs. The costs include labor, materials, supplies, permits, etc. Additionally, the contract includes a profit margin for the builder.

This type of contract is beneficial when costs are more complicated to determine at the time the contract is signed because the owner sees costs for an added layer of transparency. The contract may also include incentives for the builder to keep costs down.

Time and Materials Contracts

This type of contract allows the builder to charge for time and materials for the project. It is another option that works well when it is difficult to determine the price before construction. The contract will outline hourly rates for labor and limits for various material costs.

Like cost plus, it has the benefit of added transparency. The builder must report expenses to the owner, and the flexibility makes it suitable for projects that may be more complex.

This post is part one of a series about construction contracts. Stay tuned to learn more in part two.

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