What Kind Of Contract Should You Make With A Construction Company?

February 1, 2023

There is always something that needs to be built, and someone who does the building is the construction company.

The question is how you are going to make a deal with them. Usually, it is with a contract, and there are actually quite a few types of contracts to choose from, all aimed at satisfying the various needs of all the parties involved. Knowing which project suits the project best helps the contractors, owners, and suppliers manage risk and ensure the work and payment go as smoothly as possible. So, let us look at a few different types of contracts that might be suitable for you. 

Cost-Plus Contract

The first contract we are going to look at is a cost-plus contract, where contractors are paid for all their construction-related expenses, which is the cost part of the name. Costs can also include more direct items like labor, materials, supplies, etc. They also include overhead costs like insurance, mileage, and so on. The plus part is the agreed-upon amount for the profit. This type of construction contract is usually looked upon favorably, especially by contractors, as there is seemingly no risk of losing money on materials, plus they will certainly incur a profit. However, they will have to carefully track all their expenses and be prepared to present them, and they may also be limited on how much to spend. Some cost-plus contracts include clauses with “not to exceed” cost amounts. 

Guaranteed Maximum-Price Contract

Under this contract, the maximum amount you will have to pay the contractor is capped. The GMP contract limits the amount you will have to pay, and any additional expenses incurred are covered by the contractor. These agreements clearly define the most you will have to pay, which makes budgeting much easier and lets you turn your attention to other things, like issuing surety bonds, which you will find in turn to be most convenient and cost-effective for you, streamlining every step of your plan. The GMP includes the costs for labor, overhead, and materials and a percentage of those costs to generate a profit. Not dissimilar to the cost-plus contract, this agreement does require quite a careful review and analysis of expenses, which can be quite time-consuming on large, multiphase projects. It also places the majority of the risks on the contractor, and if the original estimate ends up below the final costs, the contractor might lose a substantial amount of money on the project. 

Incentive Construction Contracts

These contracts provide the contractor with an agreed-upon payment if the project is delivered by a certain milestone, say a date or some other specific point. If the project ends up being delivered at a lower cost and/or by the target deadline, then the contractor receives extra payment, the amount of which is specified beforehand in the contract and is often based on a sliding scale. Basically, the contractor is motivated to control costs and stay on schedule. This agreement is not only beneficial for controlling costs and timelines but also creates a more collaborative process where the contractor and the owner communicate more closely and look for new, innovative ways to get the project done. A possible drawback stems from the same point; it does require more negotiation to determine the incentives and requires the contractor to ensure that the costs and deadlines are achievable, while both parties have to clearly define all the parameters and avoid any miscommunications that may occur. 

Lump-Sum Contract

This is a straightforward contract in which the contractor delivers the project at a fixed price, rather than bidding on the deliverables. A lump-sum contract works well for projects with a well-defined scope; they are popular with straightforward work that does not require detailed estimates, which in turn makes administration and cash flow easy. It presents an easy-to-plan, digestible figure to you and streamlines business analysis and the selection process as well. One drawback for the contractor is that it is not all that suitable for more complicated projects, as it does not really factor in changes to things like material costs and site conditions. For this contract to pay off, all the details like schedule, materials, labor costs, and the like must be easily estimated. 

There are plenty of construction contracts to choose from, so do not rush yourself and weigh the pros and cons of each carefully before making a final decision. Of course, all of them are viable, but little details could make the difference between a lot of money being lost, project delays, or something else equally unsavory. It is the fine details that matter here, so pay attention to them.

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