Construction contracts describe what kind of work the builder will deliver, the time it will take to complete the project, and the amount the client has to pay. There are quite a several construction contracts out there. The construction sector applies different categories of contracts depending on the project’s capacity, delivery, plan, budget, and the groups involved.
Building estimator software is essential in all construction contracts to ensure contractors deliver accurate proposals that will enable them to win a project.
Deciding on which contract to use and under the circumstances of the project you have is analytical to ensuring an outstanding outcome at the end of a project, customer contentment, and gains.
Every construction contract has advantages and disadvantages that must be considered before you use the agreement.
Fixed Price Contract
Fixed price contracts/ stipulated sum contracts/lump sum contracts are the type of contracts that are popularly used in most construction projects. A builder agrees to construct a project for a fixed or upon a consented price in a fixed-price contract.
In a fixed-price contract, there could be price predictability for project owners because of missing changes in the range of work, unexpected circumstances, or other situations that cause the project to have some adjustments; the builder has to finalize the work for the original or the price that had already been set.
A fixed-price contract can be costlier for project owners than other construction contracts because builders understanding that they will be liable to a fixed price will frequently lead them to a cushion to safeguard themselves from cost excesses, for which the builder would not be paid back.
A fixed-price contract can add to the time and price of the architectural phase of a project, which can act on the general project deadline. They can also lead in delivering a job, not of high quality. Because builders’ may embrace a strategy of working with cheap equipment, knowing that any price savings they can attain will upgrade their profit margin.
Under a cost-plus contract, the client accepts to pay a builder for the expenses incurred in a project plus an extra fee, which can either be fixed or estimated as a percentage of prices.
This kind of contract provides the most design compliance for builders since clients can make design decisions as the plans continue, and the builders know they will be compensated for the resources used, regardless of how long the project takes or the standard of materials used.
Because time and materials can change, these contracts give owners the least control over prices. Because of the cost unpredictability, it can be challenging for clients to get construction funds. Lastly, it can be challenging for contractors to plan their work on the project to alter the workforce and other resources.
Guaranteed Maximum Price
In this kind of contract, project owners consent to pay contractors for the time and cost of materials plus a fee; however, they do it up to a guaranteed maximum price.
In this kind of contract, the builders get a range of price predictability because they will be compensated for their time and materials, and clients retain more design compliance.
This kind of contract can involve a divided savings provision, where the members agree to split any savings if the exact costs of construction are less than the approved maximum price.
Builders under a guaranteed maximum price agreement frequently build a system of cushions to protect them from expense overruns that lead the contractor to exceed the guaranteed total price.