Five Key Contracts for a Construction Business 

Construction contracts are a vital tool of the building trade. There are many different types of contracts utilised in the construction industry to help professionals secure more work. Depending on whether you are providing services or hiring a building contractor as a property owner, you will need to know your way around some of these key contracts. Therefore, this article will explain the key contracts you need for your construction business. While some can be quite complicated, this article will also explain what each contract is used for, and what obligations you will have from each contract.

1. Lump Sum Contracts

A lump sum contract is one of the most common types of contractual agreements you will encounter in the construction industry. Also known as a fixed price agreement, a lump sum contract has parties agree on a fixed price to complete an entire project. 

Having a fixed price is more beneficial to clients. This is because they will have more certainty about the final accounts for the works. Lump sum contracts can also convey some benefits that other contracts may not have. For example, a lump sum contract can include:

• incentives for early completion; and
• early termination clauses. 

Additionally, the bidding process is simpler with a lump sum contract. However, if contractors finish under budget, they will receive higher profit margins as their original price is fixed. 

However, lump sum contracts tend to give more risk to the contractor. The construction industry is very unpredictable, and prices for materials can fluctuate later. Contractors have fewer options to vary their service price under lump sum contracts, should the price of materials or labour change. Lump sum contracts also allow no margin for error. Therefore, if a contractor gets a measurement wrong, they will have to cover that material cost themselves. 

2. Time and Materials Contracts 

Time and materials contracts are better used when it is unclear how extensive the construction works will be. Typically, these contracts are best used for construction that needs to be completed quickly or for emergency work. For example, emergency contractors often fix fire or flood-damaged properties. They can then charge for the time it took them to repair the property and the materials they used. 

Typically, contracting parties will agree on a price per hour or per day for the works. Additionally, the party who owns the property will also be required to pay for the materials involved in those works. 

One benefit for property owners is the ability to place a cap on the project’s overall cost. They can also place a time limit on how long the work can go on. As with fixed-price contracts, you can insert clauses into contracts that allow contractors to receive a bonus if they finish ahead of time. These contracts are also great if you cannot fully estimate how much the works will cost or the time it will take to complete them. Otherwise, there may be uncertainty for the property owner about how much they will have to pay. 

3. Cost-Plus Contracts 

Cost-plus contracts are another option for contractors who cannot accurately gauge how much a particular job will cost. This type of contract allows them to total up the bill for all of the materials and labour costs after they finish the building work. The property owner will then reimburse them for those costs, plus an additional fee for profit. 

Typically, when construction companies submit tenders for a cost-plus contract, they will include an overhead figure for the amount the owner should expect to pay for labour and materials. Depending on the size of the job, a contractor’s profit may be calculated in several ways. The most common are: 

• cost of the contract plus a fixed percentage of that initial fee; or
• cost of the contract plus a fixed fee. 

This means cost-plus contracts are very flexible. Therefore, if you encounter any problems throughout the construction process, cost-plus contracts are flexible enough to accommodate changes.

4. Unit Pricing Contracts

For large construction projects, unit pricing contracts are more common as they allow the owner to split up the projects into smaller components. Also known as measurement contracts, these contracts require contractors to quote a price for each unit of work instead of giving a price for the entire contract. 

For example, a contractor may be carrying out work in a block of flats and may provide a quote for the completion of each apartment. In that scenario, the price for each unit can be changed depending on the level or type of building work needed in each apartment. But if the builder finds more work is required in one apartment, they can add an additional price onto the next unit to cover that work. The problem for the property owner in unit contracts is that you cannot determine a definite sum for the work. This is because unit price contracts allow a lot of flexibility for parties to alter the overall sums of the contract.

5. Guaranteed Maximum Price Contracts

Guaranteed maximum price (GMP) contracts put a limit on the price of a contract. By doing this, building owners receive greater certainty over how much the work will cost. 

Additionally, should the final contract sum exceed that cap, the owner will not pay for any labour or material costs causing the contract to spill over that cap. GMPs can be great contracts to use if you are looking to complete a contract quickly. However, they can place a great deal of risk on contractors if they go over the capped price on the contract. 

Key Takeaways 

Construction contracts can come in a variety of different forms. Depending on the nature and size of the project, you may find some contracts are less suited to your needs as a contractor or property owner than others. The five main types of construction contracts you should be aware of are: 

• lump sum contracts;
• time and money contracts; 
• guaranteed maximum price contracts; 
• unit pricing contracts; and 
• cost-plus profit contracts. 

If you need more advice on any type of construction contract, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on [number] or visit our membership page.

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