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Different Types of Commercial Construction Contracts

Updated on May 16, 2014

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If you need to complete a commercial construction project, you will want to consider the costs and the amount of time the project could take before hiring a company to execute the project. There are several different types of construction contracts that you can enter into with a company, but many companies prefer to use only a certain type of contract. A contract is a warranty that specifies the amount the construction company will be paid for the project and how the payment will be made. Here are the types of contracts that exist for commercial construction jobs.

Lump Sum Contracts

This type of contract may also be referred to as a "fixed price" contract and it includes the total price for all of the construction done on a project. Often times, these contracts will include incentives for early termination of the project, or they will have penalties written into them for a late termination. The penalties for finishing a project late are called "liquidated damages." These types of contracts are preferred by companies when the project scope is clearly explained, a construction schedule has been reviewed, and an agreement has been reached.

Cost Plus Contracts

This is a contract regarding the payment of the actual costs, purchases and other expenses related to the commercial construction project. These contracts should include specific information about pre-negotiated amounts covering the contractor's overhead and profit margin. Some of the pre-negotiated monetary amounts will include labor costs and a percentage of the materials that are needed for the project.

Any costs associated with the project should be detailed in the contract and labeled as direct or indirect costs. There are several variations of this contract type and the most common types include cost plus fixed percentage, cost plus fixed fee, cost plus with guaranteed maximum price and cost plus with guaranteed maximum price and bonus contract.

Time and Material Contracts

These types of contracts are most common when the scope of the project is unclear or hasn't been defined. The contractor and the client must agree on an hourly rate or a daily rate of pay and include any additional expenses that could arise during construction of the project. The costs are classified as direct, indirect, overhead or mark-up. Sometimes the client will establish a cap on the expenses or the duration of the project that must be met by the contractor in order to minimize the risk to the client.

Hire a Lawyer

As with any contractual agreement that you enter into, you should have your lawyer review the contract before you sign it. If it is a large construction project, your attorney might have been in negotiations with you. If you've never hired a commercial construction company before, you will be protected by having your attorney review the contract before it is signed. Making a mistake in a contract or not reviewing it carefully could cost you money that you don't have and put your business at risk. Having an attorney review contracts will help to prevent any issues.


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