Types of Construction Contracts
1 – Lumpsum Contract
In a lump sum contract, the engineer or/and contractor agrees to do the specified project for a fixed price. Also called “fixed fee contracts,” these are often used for engineering ventures.
A lump sum or fixed fee contract is appropriate if the scope and schedule of the project are sufficiently defined to allow the consulting engineer to estimate project costs.
2- Unit price Contract
A unit price contract is a type of construction contract based on estimated quantities of items included in the project and their unit prices as initially estimated (rates may be hourly, the rate per unit work volume, etc.). In general, the contractor’s overhead and profit are included in the rate. The final cost of the work depends on the total quantity of items required to carry it out and complete it.
Unit price contracts are appropriate only for a project which involves well-known resources in quantities which are unknown at the time of the agreement, and will be defined when the design and engineering or construction work is finished.
A unit price agreement is one of the best choices for construction or supplier projects where the contract documents can correctly identify the various kinds of items, but not the numbers that are needed.
It is not uncommon to combine a unit price contract with a lump sum contract or other types of agreement for some parts of the project.
3 – Cost Plus Contract
This is a contract agreement wherein the purchaser agrees to pay the cost of all labor and materials, plus an amount for contractor overhead and profit (usually stated as a percentage of the labor and material cost). In construction, a cost-plus contract may be specified as:
Cost-Plus + Fixed Percentage
Cost-Plus + Fixed Fee
Cost-Plus + Fixed Fee With Guaranteed Maximum Price
Cost-Plus + Fixed Fee + Bonus
Cost-Plus + Fixed Fee With Guaranteed Maximum Price and Bonus
Cost-Plus + Fixed Fee With Agreement for Sharing Any Cost Savings
Cost-plus contracts are preferred when the scope of the work is indeterminate or highly uncertain and the kinds of labor, material and equipment needed are also uncertain. Under this arrangement, complete records must be maintained of all time and materials that the contractor spends on the work.
4 – Time Materials Contract
Contracts for time and materials (T&M) are a hybrid of fixed and cost-reimbursing contracts, and are used in cases where there can be no clear scope of work: for example, if the number of hours that the client needs is not clear. In this case, a set professional hourly rate is used (for instance, fees and costs). With this kind of contract, it’s always a good idea to set a ceiling or a price that cannot be exceeded, to prevent being overrun with heavy costs.