Contracts are the core, the heart and soul, of the construction industry. As a contractor, you know that these written agreements not only define the scope of services you will provide, but they allow you vital protections against lawsuits and liability issues should anything go wrong during the course of work. Construction law is difficult and complex and, it seems, ever changing. Here’s an overview of what you need to know about the different types of construction contracts.
Fixed Price and Lump Sum
There are three types of construction contracts that are most commonly used, and of these the most common is the lump sum or fixed price form of contract. With this type of contract, the property owner seeks bids from several contractors to get the best deal they can. Since with this system the entire scope of a project is presented up front, this contract is able to clearly outline the scheduling, deadlines, costs, budget and other crucial aspects of the project.
Cost plus contracts are more open and freeform. They are best applied when the costs and timeframe for the project are somewhat unclear. They allow the payment to be negotiated rather than defining it as a fixed cost. It essentially agrees that the contractor will be paid for the costs of the job plus labor fees, which can be set or a percentage and may include a bonus for quick completion of the job.
Time and Material
When the overall scope and details of the project are largely or completely unknown, a time and material contract can be implemented. Whatever the variables are, if the project is nebulous, this kind of contract is an option, though it is generally the least favorable of the three types. It agrees on an hourly rate for the contractor and materials paid for by the property owner. Separate fees are negotiated for contractor profit and overhead issues.
If your company is a union shop, there are other considerations and guidelines you will need to follow to ensure that the job contract is in line with union requirements. There are expectations that the union will have to see fulfilled before work can commence, including conditions of employment, discrimination issues, grievance procedures and the like.
These types of construction contracts will also address the kinds of workers you will be using. Most common are subcontractors who use their own equipment and are licensed on their own. They have to be specifically accounted for within your job contract, or you could end up with liability and lawsuit issues if things go wrong.
Direct hire employees, on the other hand, work for you and your company. These employees carry fewer but different liability issues. You will have to account for payment practices, the type of work performed and working conditions when dealing with direct hires. Don’t forget to keep your company and your employees protected with workers compensation insurance.