A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions recorded in document form. The two parties involved are one or more owners, and one or more contractors.
Types of Contracts
- Lump Sum and Scheduled Contract - In lump sum contract the complete work as per plan and specifications is carried out by a contractor for certain fixed amount as per agreement. The owner provides required information and contractor charges certain amount. This contract is suitable when the number of items are limited or when it is possible to work out exact quantities of work to be executed. The detailed specifications of all items of work, plans and detail drawings, security deposit, penalty, progress and other condition of contract are included in agreement.
- Cost Plus Fixed Fee Contract - In cost plus fixed fee, the owner pays the contractor an agreed amount over and above the documented cost of work. This is a negotiated type of contract where actual and direct costs are paid for and additional fee is given for overhead and profit is normally negotiated among parties. The owner is in more control of the project; however, the risks are transferred to the owner.
- Cost Plus Fixed/Variable Percentage Contract - In cost plus percentage, the owner pays greater than 100 percent of the documented cost, usually requiring detailed expense accounting. In this type of contract, contractor is paid the actual cost of work plus certain (Fixed or Variable) percentage as profit. Various contract documents, drawing, specifications are not necessary at the time of signing the agreement. Contractor has to keep all records for cost of material and labour and the contractor will be paid accordingly to the engineer incharge.
- Unit Price Contract - This contract is based on units put in place rather than a single price. The payment is calculated at a specific rate for each item such as cubic yard for concrete times quantity put in place. The contractor quotes an owner a price for a particular task or scope of work, though at the time of contracting the parties may not know the actual number of the units of work to be completed. Consequently, the owner does not have an exact final price till the project is finished.
- Target Estimate Contract - Target cost contracts base their pricing on a figure that's aptly known as the target cost. This number is negotiated by both the contractor and the client before signing the contract, and represents the expected cost to the contractor of providing the agreed goods or services. If the final cost of the project is below the target cost, both the contractor and the client split the savings (the "gainshare"). Similarly, if the final cost exceeds the target cost, both parties are responsible for paying this extra money (the "painshare").
- Guaranteed Maximum Contract - Is a specific type of contract wherein the contractor receives compensation for any actual costs that are incurred, plus fixed fees. Basically, any savings that result from cost “underruns” are returned to the owner.
The owner has full authority to decide what type of contract should be used for a specific project to be constructed and to set forth the legally binding terms and conditions in the contractual agreement. A construction contract is an important piece of document that outlines the scope of work, risks, duties, and legal rights of both the contractor and the owner.