Types of Construction Contracts

posted by Michael Fortney  |  Dec 15, 2009 9:51 PM in Construction Law

The purpose of the construction contract is to (1) allocate the duties between the parties, (2) recognize and allocate the risk to the different parties, and (3) reduce the uncertainty surrounding the project and allow the parties to plan for the project and the future.  

Written or oral contract

Construction contracts may be oral.  However, it is recommended that construction contract be in writing.  A written contract presents a clear record of the parties’ agreement, whereas and oral agreement is subject to the parties’ recollection of the terms.  

When entering into a written contract, the parties should make certain that the writing accurately reflects the agreement between the parties.  The parole evidence rule may prohibit evidence of contract terms differing from those in the written agreement.  The integration clause of a contract also prohibits evidence of other terms or negotiations.

Stipulated value (lump sum)

This is the typical contract with a negotiated lump sum price.  This type of contract is preferred by owners for the following reasons:

• owners can utilize a competitive bidding process

• all risks are placed on the general contractor 

• the general contractor must control costs and perform efficiently

Before entering into this type of contract, the owner must have detailed plans and specifications for the project, and the general contractor must have clear and specific instructions and scope of work. 

Unit price

Unit price contracts are used when the owner knows the type of work needed, but does not know the quantity of work necessary.  The payment to the contractor is based on the computed quantity of work and the unit price.

Cost-plus (time and material) with fixed fee

A cost plus contract is often used in the absence of detailed plans and specifications.  The general contractor is paid for all costs incurred.  The general contractor is also normally paid a fee for overhead and profit, plus a fee for general conditions.  The owner assumes all risks of excessive costs.  Frequently, an incentive provision is used to encourage cost savings by the general contractor.  

Cost plus with a fixed fee up to a guaranteed maximum price

This type of contract is amenable to the design build situation, where the general contractor also serves as a designer.  The GMP is arrived at after the project has been completed to the design development stage.