Types of Construction Contracts

Construction Contract Types: Many differenct types of contracts can be used to define the rights, responsibilities and obligations on a project. The following examines some of the more common types of contracts.

Lump Sum Contract: A lump sum contract, sometimes called stipulated sum, is the most basic form of agreement between a supplier of services and a customer. The supplier agrees to provide specified services for a specific price. The receiver agrees to pay the price upon completion of the work or according to a negotiated payment schedule. In developing a lump sum bid, the builder will estimate the costs of labor and materials and add to it a standard amount for overhead and the desired amount of profit. Advantages of the lump sum contract include:  1) Low financial risk to Owner; 2) Known cost at outset; 3) Minimum Owner supervision related to quality and schedule; and, 4) Contractor selection is relatively easy. Some disadvantages are: 1) Changes difficult and costly; 2) Early project start not possible due to need to complete design prior to bidding; and,  3) Bidding can be expensive and lengthy.

Unit Price Contract:  In a unit price contract, the work to be performed is broken into various parts, usually by construction trade, and a fixed price is established for each unit of work. For example, painting is typically done on a square foot basis. Unit price contracts are seldom used for an entire major construction project, but they are frequently used for agreements with sub-contractors. They are used for maintenance and repair work. In a unit price contract, like a lump sum contract, the contractor is paid the agreed upon price, regardless of the actual cost to do the work.

Construction Management Contract: In this delivery method a Construction Manager (CM) is selected to construct the project based on fully completed drawings and specifications prepared by an architect. The CM provides advice during design. The CM is selected based on competitive proposals from three to five firms. The CM approach differs from the other methods in the following ways: 1) The project manager approves the CM’s construction management staff and their required time on the project; 2) The CM provides pre-construction services, including construction cost estimating and constructability review, throughout programming and design; 3) The project manager approves the subcontractor bidders list and the selected subcontractors; 4) All of the costs of the CM and subcontractors are "open book" to the project manager and subject to the project manager’s approval. There is no profit mark-up by the CM on the subcontracts.  CM construction contracts are commonly structured in the cost-plus-free or guaranteed maximum price format.

Design-Build Contract: In this process the owner selects one contractor to both design and build the project. This method is not a favorite of owners because it limits their ability to control quality, is difficult to confirm adherence by the Contractor to specific materials, and it is difficult to make changes with this method. This method is primarily intended to save time. There also can be slight savings in design costs.