Construction contracts are legally binding documents which cements an agreement between two or more parties for the construction of a building or many buildings. Construction contracts have different clauses pertaining to the dimensions, the raw materials used, the time of completion and the purposes that the building will serve as well as the payments being made to the people involved in the contract.
There are various different types of construction contracts that people can enter into during this process and they are endlessly customizable depending on the deal and the confines of the law and civil codes. The contract types are defined by the way that the disbursement is going to be made and other terms that are specific to the project. These Contract Administrations can include the specifications of the building and the quality of the building being built.
There are two different types of conditions in a contract; general conditions and special conditions.
General conditions are standard and suit the majority of the contracts that are signed in construction. These are the terms included in them:
- Definition of the Project
- Contract Components
- Rights and Responsibilities
- Project Schedule
- Payment Method
- Warranty and Delay Penalty
Special Conditions are modifications and customizations made at the behest or on the agreement of all parties involved to suit certain situations. These Contract Administrations make the contract flexible and make the specific objectives of the project achievable.
There are also certain things that impact the selection of construction contracts and they are:
The type of contract should meet with the objectives that are laid out for the project.
Constraints occur in every construction project, whether it is the raw material availability, the nature of the land that is being used or the labor available to carry it out.
This Contract Administration determines the relationship between the parties that are involved in the project itself and how they are interacting with each other through the initiation and the completion of the project itself.
Types of Contract
There are several types of contracts and they are customizable to a large degree as stated above; however, there are certain contract types that have been chalked out to reoccur and have been generally accepted as standard in the construction industry. They are: the Lump Sum contract, the Unit Price Contract, the Cost plus Contract, and the Target Cost Contract.
Lump Sum/Fixed Price Contract
This type of Contract Administration involves a total fixed price of all construction related activities so there is little room for error or renegotiation. The lump sum contracts include incentives and benefits for early termination and also have penalties which are called liquidated damages which occur for a late termination. The lump sum contract is preferred when the project in question has a clear scope and doesn’t have a lot of customization or modification in sight. When you have a standard schedule and a standard goal to achieve, it makes sense to get the standard lump sum contract.
This is also a great contract to use when any risk of any kind is transferred to the builder and the owner needs to avoid any change orders for work that is unspecified. However, the contractor also has to include a percentage cost that is associated with carrying that risk along. The costs are hidden in the fixed price itself though. On the flip side, it’s also hard to get back the money for work not completed; hence the contract is rigid for both parties in a way.
Cost Plus Contracts
This Contract Administration involves paying the actual costs involved during construction. So you can call it a pay as you go contract if you so choose. The purchases or expenses that are generated from the activity of construction are paid for and a lump sum is not decided beforehand. The cost plus contract should contain some specifics on pre-negotiated amounts for material and labor cost as well as for covering the contractor’s overhead and profit. These costs should be detailed and should be classified as those that are direct and indirect.
The most common variations of these costs are cost plus fixed percentage, cost plus fixed fee, cost plus with guaranteed maximum price contract and cost plus with maximum price and bonus contract.
Unit Pricing Contracts
Unit Pricing contracts are another type of construction contract commonly known by builders and the feds. These contracts are very specific in that they allow the purchase of materials at their unit prices and so the owner is aware that these prices being charged are un-inflated. The unit price can be adjusted for scope changes when the time comes and this makes it easier for the builder and the owner to reach agreements when changes occur.
The unit prices can be set up during the bidding process because the owner is requesting specific quantities and pricing for a pre-determined amount of items that have to be unitized.
Target Cost Contract
The target cost contract has a lot of features of the lump sum contract and the cost plus contract. However, the contract is paid based on the actual costs and the fee or the fixed percentage of the total cost in case the cost of the project doesn’t exceed a target that was set.
The risk involved is borne by the contract in case of an increase in the cost of the project.
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