Construction contracts are mainly used for pricing the construction and also serve as a means of allocating risks among the involved parties. The owner alone has the power to decide, about the type of contract, to be used for construction process and to determine the terms and conditions of the agreement. Here are three types of construction contracts which are used most often.
1. Lump Sum Contract
In this type of contract, the owner assigns all the risks involved, to the contractor. The contractor has a little advantage of asking for extra markup, so as to take care of any unexpected contingencies. Besides fixed price, other engagements of the contractor include submission of schedule forms, quality control activity or a reporting system of management. There are chances of underestimating or overestimating the overall costs. Underestimated cost will lead to reduction of contractor’s profit, while an overestimated cost will have unfavorable effects on the owner.
2. Unit Price Contract
This contract eliminates the risks involved in inaccurate evaluation of uncertain elements for contractor. A contractor has the opportunity to increase the unit prices slightly, on underestimated quantities and to reduce the unit cost on other quantities. This task depends on the confidence of the contractor, on his estimates. If the assessment happens to be correct, then it can potentially increase the profits of contractor, as payment depends on actual measures of tasks; and in reverse case, the contractor can incur loss. Moreover, if the owner finds the bid to be unbalanced, then the contractor may be disqualified.
3. Target Estimate Contract
In this type of contract, a reward or penalty is specified for the contractor, based on whether the final actual cost of the construction project is more than or less than the cost estimated by the contractor. Savings percentages, if any, are predetermined in the contract, to be shared between the contractor and owner. Duration of the project is also specified in the agreement. Penalties or bonuses may be decided for different completion dates of the project.