Common Types of Construction Contracts
Antonoplos & Associates group of construction attorneys are here to help guide you through any legal issues that may occur during a construction project. Our attorneys most commonly assist clients with drafting construction-related contracts, providing legal representation, providing ‘front-end’ advice, submitting construction claims, and ensuring that your business gets paid for all the work you perform through contractual language and when necessary, mechanics liens.
One of the best ways to prevent and limit construction litigation is to create an air-tight and relevant construction contract. The best way to achieve this goal is to understand what a construction contract should include and the common types of construction contracts. The reason why this is important is that if you can utilize different contracts, you can create a contract to fit the needs of each of your specific projects. Below is an overview of what a construction contract should include and a guide of the common types of construction contracts: lump sum or fixed-price contracts, time and materials contracts, incentive contracts, cost-plus contracts, unit price contracts, guaranteed maximum price contracts, and design-build contracts.
For many parties in the construction industry, focusing on creating a good construction contract is seen as a distraction that keeps them away from their focus on current projects or finding new clients to work with. As such, many construction focused companies create a simple and general contract that they can use for each job. Creating a contract that is suitable for every project can keep costs low and allows a company to become familiar with the contract. However, using a general contract can lead to costly litigation. Furthermore, this practice opens the door for other parties to take advantage of missing provisions.
One way to avoid potential legal issues while still keeping legal costs low is to decide what types of construction projects your business most commonly partakes in. After narrowing down practice areas, hire a lawyer who can draft project-specific contracts. The benefit is that these contracts only need minor tweaks from project to project. For example, if you are a construction company that most commonly works on residential real estate projects, you could hire a lawyer to create separate contracts for you to use when you are building a property, remolding an existing property, or simply offering your advice on how to utilize undeveloped land. While creating specific contracts is important to ensure that you are safe from legal liability, there are a few things that every construction contract should cover.
These standard provisions include:
- Start and End Dates of Work
- Payment Schedules
- Scope of Work
- Dispute Resolution
- Change Orders
- Termination Agreements
Finally, if there are competing provisions in a contract, a construction attorney can help establish an “order of precedence clause”. This clause allows you to rank the provisions in a contract. Thus, if provisions conflict, you and the other party in an agreement will be able to understand which portion of the document to follow. A standard order of precedence clause will start with any change orders, the agreement, special conditions, general conditions, specifications, drawings, then list any other materials that form the contract documents. In cases where inconsistencies in a contract cannot be quickly resolved, Antonoplos & Associates construction attorney can provide legal representation for your business.
Lump Sum or Fixed Price Contracts
A lump sum or fixed-price contract is the most common and basic type of construction contract. The reason why many construction companies use these types of contracts is that they outline one price that incorporates all the work that will be done on the job. However, there are key benefits and disadvantages to using a lump sum contract that you should understand before entering into this type of construction contract.
First, a lump sum contract is a great option for both the property owner and construction company when the scope of work is clear and there is a definitive schedule that both parties can agree on. However, every construction project includes a certain amount of uncertainty stemming from extra work, unknown delays, or other issues that either extend the timeline of the project or require the construction company to complete more work then what was previously thought. In this scenario, a lump sum contract can greatly benefit the property owner. However, to combat the potential for major losses, it is normal for construction companies to add hidden costs to offset any issues that occur which would cost the construction company money. Thus, a lump sum contract may be useful for the construction company as they can pocket any extra savings they receive from finishing a job quickly and under budget.
As the property owner, a lump sum contract will not lead to economic harm if issues occur. Thus, it is imperative that as the construction company, you double-check all of your price calculations. This ensures that you have a good understanding of how much the project will cost. Furthermore, if some unforeseen issues do occur, it will not eliminate all profits.
Time and Materials Contracts
Construction companies using time and materials contracts will normally do so when there is not a clear scope of work. The reason for this is that the property owner and construction company will agree on hourly or daily wage rates. Furthermore, they will also discuss who will be responsible for additional expenses.
The main benefit of using a time and materials construction contract is that this type of contract is agile and can easily factor in extra expenses that pop-up during the project. However, to prevent construction companies from having a blank check, most projects will include a price cap or specific project timeline. One disadvantage to using a time and materials contract is that keeping track of this information—especially on large scale projects—becomes extremely time-consuming for the construction company. Additionally, there is no easy way around this obstacle as failing to provide the exact labor and materials for a job leads to lower profit margins. A time and materials contract is useful in most situations but is especially helpful if both parties have a general understanding of how long and costly the project will be.
A cost-plus or cost-reimbursement contract is a type of contract where the property owner will pay for the labor and materials on a project and then pay the construction company a set amount of money or percentage as profit. Thus, a cost-plus contract involves all direct costs, indirect costs, and profit for the construction company.
A major benefit of using cost-plus contracts is that the project can easily change. Thus, the construction company will not have to worry about losing profit from extra labor or material expenses. Additionally, cost-plus contracts are inherently flexible. Thus, if a construction company gives an inaccurate initial bid, they will not lose money on the job.
A downside to using cost-plus contracts is that you must keep a meticulous record of all labor and materials. Furthermore, the property owner may feel you are exaggerating hidden administrative costs or mileage. This can lead to resentment between parties that is only detrimental to the project at hand.
Unit Price Contracts
Unit price contracts are also known as measurement contracts, measure and pay contracts, or remeasurement contracts. This type of contract divides the total work necessary to complete a project. After this step, the work is split into separate units. Once the property owner divides this work, a construction company will give a price estimate. This price estimate is for each unit of work instead of a price for the entire project.
The main reason why unit price contracts are useful is that they offer transparent pricing. The reason for this is that as labor in the main variable and it is sectioned off into each unit. This allows property owners to clearly see where costs are coming. This action helps to avoid conflict at the end of the job. Furthermore, if additional work is necessary to finish a project, you can simply add this as a stand-alone pre-priced unit. Using this tactic makes it easy to change or manage the scope of work on a given project.
There is one potential drawback to using a unit price contract. This drawback is that the amount of labor necessary to complete a project is mostly unknown. Thus, you may end up spending more money then you had initially wanted. One way to avoid this is to have a construction company gave you a bid with a price estimate.
Unit price contracts are especially useful when projects are heavily dependent on material costs. Additionally, they are helpful when the amount of labor is not clear before the project starts.
Guaranteed Maximum Price Contracts
A guaranteed maximum price contract can stand alone or simply be a provision in another type of construction contract. This type of contract or provision establishes a price cap on a contract before the project begins. Thus, the construction company must pay any labor or material cost that exceeds this cap to finish the project.
A guaranteed maximum price contract is best for projects in which there are few or no unknown variables. Furthermore, having a maximum price limit that you are willing to spend allows you to find a construction company quickly. Additionally, a construction company may not meet the maximum price for the project. In this case, property owners will typically share a portion of the savings with the construction company. This acts as a great incentive to ensure that the work is being done properly without incurring unnecessary costs.
The downside to using a guaranteed maximum price contract falls entirely on the construction company. For example, a project could go over the maximum cost. If this occurs, the construction company will have to pay for the reaming work themselves. Furthermore, a construction company must ensure that they are not entering into a bad guaranteed maximum price contract. Thus, they will need to spend more time surveying a project and may even need to seek expert advice.
A construction attorney does many things to ensure that your business can focus on the projects and continue running smoothly. One misconception is that construction attorneys and real estate attorneys are the same. While they work on similar cases, the area of law that they practice is fundamentally different. Many businesses consider hiring one attorney for both real estate and construction legal issues to save money. In order to receive knowledgeable legal representation, you must ensure that your attorney has experience in both real estate and construction law. If the attorney you hire does not have knowledge about both practice areas, you should hire a separate attorney.
Peter Antonoplos has been consistently ranked as one of the best construction and real estate attorneys in Washington DC by venerable companies such as LevelSet, Avvo, and Expertise. Peter has over 20 years of experience in both the construction and real estate industries. As such, he is one of the few attorneys in Washington DC that can handle all of your legal needs.
Contact our DC Law Office for More Information
Finally, for more information on common types of construction contracts, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding construction law, check out our blog.