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What are the four basic construction contracts?

Every construction project requires a contract. Even a project that seems simple can evolve into a complicated mess. A contract helps ensure that the other party fulfills its duties to you.

When you are drafting a contract, you may find yourself overwhelmed by the process. Before creating the contract, it may help to know the four major types of construction contracts.

  • Lump sum/fixed price

In this contract, each party agrees on a fixed price for all construction activity. Usually, these contracts work best when the builder assumes the risk and the owner avoids change orders for unspecified work.

  • Cost plus

In cost plus contracts, a party pays the expenses generated from the construction activity. These contracts must be very detailed, and are best used when the scope of a project is not yet defined.

  • Time and material

When both parties establish a daily or hourly rate for time and material, they use a time and material contract. Generally, these contracts should be used for projects that have a smaller scope or a realistic deadline.

  • Unit pricing

Popular with builders and public entities, unit pricing contracts set a price for a pre-determined number of units. The prices can be adjusted depending on the cost of units.

Which contract is best for your project?

It is crucial to select the construction contract that best suits the scope of your project. For example, if you know that your project requires a certain number of units, then a unit pricing contract may work best.

However, not all construction projects are this clear-cut. Some projects involve elements from all four types of contracts. If this is the case, you must take extra caution when drafting a contract. Many owners and contractors seek counsel from a construction attorney. It is up to you to draft a contract that upholds your rights and protects your best interests.

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