A Construction project involves many persons, and a basic document is necessary where everyone’s rights and liabilities are defined for the smooth conduct and successful completion of the project. The construction contract is an agreement between the parties involved in the construction project that defines the terms and conditions on which the construction must be completed.
The Construction contract is drafted in such a way that it contains all the
As such, the construction contract is the basic document on which the entire construction work is executed with a clear definition of the rights and obligations of each one of the parties engaged in the construction work. Hence the construction contract is drafted and executed in such a way that it can be enforced in a court of law.
The Construction Contract is an exhaustive and extensive document that covers and deals with every phase of the construction project. It is prepared based on the following construction documents like
There are various types of construction contracts in operation to suit each construction project’s uniqueness that have different ways of achieving the result of the successful completion of the construction work.
Every project has its particular circumstances and uniqueness, so it’s crucial to select the contract type which suits the project. The selection of a particular type of construction contract depends on factors like
In practice, we see that construction contracts come in many types with their own advantages and disadvantages. These are mainly categorized into two major types depending on the method of payment to be made by the project owner to the contractor or the person who is directly involved in the project’s execution.
In this type of construction contract, the contractor works out the quantum of works involved in the construction project and prepares a detailed bid with a single fixed price to complete the entire project activities.
In this type of construction contract, the contractor takes responsibility for preparing the estimation for the entire project costs based on the project specifications and the project drawings and adds his mark–up as his profit, and submits the same as a single bid to the project owner.
When the project owner accepts the bid, the contractor has to complete the project within the price set in his bid, and the project owner has to make the payment of the agreed bid amount as the project cost to the contractor.
Pros of Lump Sum type of construction contract
Cons of Lump Sum construction contract
So, this type of lump-sum payment construction contract may work against the contractor. Especially in large construction contracts, there is more room for suffering loss unless the contractor can have a very high degree of performance without giving room for errors missteps during the project’s execution.
Hence, this construction contract is more suited for smaller to medium types of projects with well-defined and predictable scopes of work.
This is a type of construction contract in which the contractor gives an item war project cost to the project owner and undertakes the project upon the condition that he will be paid for each unit of the project on its completion. The contractor gives a detailed break-up of the project, takes each item of the work on a fixed unit cost, completes it, and gets paid for that unit of work.
In this type of contract, the project’s risk is shared by both the contractor and the owner, and this offers more flexibility to the contractor as there is a good chance for taking care of the unexpected setbacks and errors in the construction.
Pros of Unit Price Construction Contract
Cons of Unit Price pricing contract
In this type of construction project, the contractor is paid as per the project’s actual cost after including direct and indirect costs incurred by the contractor. He is paid a specific fixed fee or a percentage of the total project cost.
In this type of construction contract, most of the risk resides with the owner, and he has to be actively involved in the management of the project, as the contractor will not be affected by the errors in the work or missteps, and there are no chances of facing loss by the contractor as he is entitled to receive his fixed fee.
In this type of construction contract, the contractor agrees to complete the project at a target cost, and in return for this, the owner agrees to pay the contractor a fixed or a percentage of the project’s total cost. In this type of contract, the contractor is exposed to risks as he will not get any amount if the project cost exceeds the specified target price.
There is a risk carried by the contractor in case of an increase in construction projects’ cost. The contractor has also rewarded a percentage of any savings between target and actual cost.
In this type of construction contract, there is a cap on the project price, and the contractor has to complete the project within this price range; and if he is not able to complete the project within this price, then the contractor has to bear the extra cost to complete the project.
This type of project is good for projects with fewer or no unknowns.
Pros of GMP contracts:
Cons of GMP contracts
This type of construction contract is used in the case where the scope of the project cannot be defined easily. In this contract, the contractors are reimbursed for the cost of the materials used by them along with payment for the labor based on an hourly or daily rate.
Pros of T&M
Cons of T&M
Thus there are many types of construction contracts, and you have to carefully choose the one that is capable of assuring the best results to you at the best possible pricing. Though uncertainties may crop into the project during the execution phase, these can be easily taken care of when your construction contract is wide enough to accommodate and provide for them without tipping you off the ground.
This post was last modified on March 3, 2021 2:34 am
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