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Know these 4 basic types of construction contracts

Having a legally sound contract in place is crucial before beginning a construction project. Some of the important topics that a contract can address include the specifications of a project, the timeline and the amount of compensation. Contracts can also prevent headache-inducing complications down the road.

A construction contract can protect both homeowners and contractors if a construction dispute should arise. Before you and your attorney sit down to write a construction contract, you should know about four common types of these contracts and whether they may be right for your project.

1. Lump sum or fixed price contracts

In a lump sum contact, also known as a fixed price contract, the owner agrees to pay a set sum of money for all of the construction activities. Generally, the best time to sign a lump sum contract is when the project in question has a clear definition and a predictable schedule. Otherwise, the owner risks overpaying for a project that is finished early, and contractors risk losing money on a project that runs over deadline.

2. Cost plus contracts

Cost plus contracts require one party to pay the costs that are generated by the construction project. This can include building materials, cost of labor, contractor’s overhead and profit. When the scope of a project is not quite clear, it can be beneficial to the owner to use a cost plus contract in order to set a limit on how much they end up paying the contractors.

3. Time and material contracts

If a project has not yet been totally defined or does not have a definite scope, a time and materials contract may come in handy. Time and materials contracts are particularly helpful for small projects whose timelines are easy to predict. In these contracts, both parties will agree on an hourly or daily rate plus the cost of expenses.

4. Unit pricing contracts

Unit pricing contracts are not as common as the previous three examples—they are generally used by federal agencies. When two parties enter into a unit pricing contract, they agree on a set unit price based on how many units the project will require. If the scope of the project changes, the owner and builder can renegotiate the unit prices.

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