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As homeowners, business owners, landlords, property owners or developers, you will enter into agreements with contractors, whether for minor repairs, major improvements or developing a project.
It is important for you to understand the most common types of contracts that are typically used in the construction industry. Having been involved in construction law since 1988, I have seen all types of problems created by a lack of understanding of construction agreements, as well as encountering numerous costly problems which could have been avoided by using proper and carefully drafted documentation. I therefore cannot over emphasize the importance of having an attorney, knowledgeable about construction law, review any contract of substance before you sign it. Below is a very simplistic overview of some common types of construction contract concepts.
Fixed Price Contract
A fixed price contract is one where the contractor agrees to perform the designated work for a specific price. This allows you to determine the exact price for the work to be performed. However, a fixed price contract may be problematic unless you are able to determine, in advance, the precise scope of the work to be performed. Overlooked items or changes to the scope of the work can add unexpected additional costs. Further, in order to protect themselves against unforeseen problems or issues, some contractors will add an additional markup to the contract amount as a precaution.
A cost‑plus contract provides that the work will be performed at the contractor’s “cost”, plus a certain additional percentage to cover overhead and profit. This type of contract provides the consumer with significant flexibility and control over the work and materials. However, having too much flexibility, making changes or not knowing in advance the full scope of the project can allow the costs to escalate beyond what you may originally have anticipated. One way to address this potential problem, in some situations, is to provide for a maximum price for the work to be performed. However, if the costs start approaching the maximum agreed amount, then it may be necessary to cut back on the level of work or the quality of materials used, in order to complete the project within the maximum amount. Also, it is important to define how the “costs” will be computed.
A design‑build contract typically provides for a turn key project. The contractor will design the project (or have an architect or designer do so under the contractor’s direction) and then build the project pursuant to the plans. This can be very beneficial to a consumer, since all responsibility for the design and work rests with a single contractor. However, requiring a contractor to perform all of the design aspects of the project can be time consuming and costly. This type of contract can be for a fixed price or on a cost‑plus basis.
The type of contract that is best for your particular situation will depend on the specific facts and circumstances. In addition to the examples given above, there are blended contracts which contain different elements of various types of contracts. The amount of involvement that you desire to have in the project, from designing to building, also plays a significant role in the decision to be made.
Lastly, the language contained in the contract is critical, since it determines the scope of the contractor’s obligations, the cost structure, and the rights and remedies of the parties. Boilerplate type contracts seldom work for all but the most simple of projects. Accordingly, you will likely save money, regrets and aggravation by investing a little time with an attorney familiar with construction contracts before entering into any such agreement.