8 Types Construction Contracts You Need to Know

Construction contract

According to the Global Construction Industry Report of 2021, the industry is forecasted to hit $10.5 trillion come 2023. It’s moving at an average growth rate of above 4%. With the rising opportunities globally in commercial and residential infrastructure, the industry’s future looks luminous.

The growing needs come with new construction trends, which directly impact the industry, including support for green construction. Artificial intelligence falls among the emerging technologies revolutionizing industries, and the construction sector hasn’t been left out. AI contract review software is now particularly beneficial in the construction industry and can help construction companies save money and drive efficiency by leveraging their contracts.

Contract review AI tools helps contract professionals strategize and reach informed decisions with a better understanding of contract risks. However, contract review AI tools and its technologies, like the AI contract review or contract analysis software, do not come to replace professional contract managers. It aims to streamline and automate contract management processes like a contract request or initiation, authoring, negotiation/redlining and approval stages, execution and signature as well as obligation monitoring, renewals, amendments and expiration. As such, construction contract management professionals must still understand the typical construction contracts and how to better protect their business from contractual risk. Here are the eight you must understand.

1.     Design-build Contract

The contract addresses the building design and cost. Construction begins before the final design is complete, saving time and money. Construction begins on time and speeds up the process without disputes. Designers must emphasize their drawing process and ensure there will be no need for changes. The contract also merges the design and construction delivery instead of having a contract for each.

2.     Cost-plus Construction Contract

In this construction contract, the contractor in charge receives payment for all the expenses related to the construction. It factors everything, including materials, overheads, labor, and other costs. Also, they include an agreed amount to be the contractor’s profit, which is responsible for the ‘plus’ in the contract’s description.

Most contractors prefer this type of contract as it minimizes the chances of losing money on the construction materials.

3.     Lump-Sum Contract

Under the lump-sum contract, the contractor agrees to deliver the project at an agreed price instead of bidding on the deliverables. The contract is pretty basic and does not carry any detailed cost estimates, ultimately making estimating cash flows in the end easier.

The lump-sum contract makes it easy to plan for the project owner and allows for seamless project analysis by the contractor. However, it is not the best for complex projects that require factoring in aspects like site changes and material costs.

4.     Unit Price Contract

The unit price contract addresses the contract details on a per basis. The contract states each price per unit, whether for overheads, materials, supplies, and labor. The parties agree on the units, and the contractor receives payment based on an agreed price. It is a perfect contract type for projects that are easy to quantify into units.

5.     Integrated Project Delivery (IPD) Contract

The integrated project delivery contract is the agreement between the contractor, the project owner, and the design company. They follow a shared risk and reward project model. The project delivery is based on one contract that covers all aspects, including the cost, liabilities, and tasks ownership.

The contract spreads risks and rewards among the parties involved based on the outcome. They agree to receive a specific amount once the project is a success.

6.     Incentive Construction Contract

The incentive construction contract is conditional on project completion time. Contractors are to receive agreed amounts if they complete the project by a specific date. Also, if the project is completed on or before the due date and at a lower cost, the contractor receives additional payment per the agreement. Here, contractors leap from their ability to control cost and time.

7.     Time and Materials Contract

In this contract type, the project owner commits to pay an amount based on the materials needed, time spent on the project, and an agreed profit. The contract also accommodates possible changes in the labor and material costs.

8.     Guaranteed Maximum Price Contract

Under the guaranteed maximum price contract, the parties agree on the maximum price the project owner can pay for the construction. Many project owners prefer this type of construction contract because it protects them from incurring additional costs should there be changes. The project owner pays a one-time amount that includes the cost of labor, materials, overheads, and a profit for the contractor.

Final Word

Typically, construction contracts provide the scope and terms for a construction project. Due to the difference in the contract types, contractors and project owners must review the options before deciding. Contract review AI tools like BlackBoiler can be beneficial in these reviews.