Construction contracts come in many different varieties, but they all serve the same principle function — to clearly summarize the rights and responsibilities of the contractor and the buyer. It is important to familiarize yourself with the different types of construction contracts to ensure your firm isn’t compromising its earning potential.
A Houston construction attorney can help you weigh the advantages and disadvantages associated with different types of construction contracts including lump sum, time and materials, design-build, and unit price contracts. Contracts establish the baseline for a project and drive it forward, so you want to make sure the contract puts you in an advantageous position to increase your profits and protect your interests. In part one of this two-part article, we will explore lump sum contracts and time and materials contracts.
When you sign a lump sum contract, you are entering an agreement to complete a project for a fixed cost. The contractor agrees to complete all work defined in the contract for a lump sum, and the buyer agrees to pay this lump sum in full. The pricing on a lump sum contract takes into account the project expenses including materials, overhead, and profit. This contract is advantageous for the buyer, who agrees to a singular price they believe is fair for the requested project. If the contractor can cut costs or complete the project with less manpower and materials than anticipated, they can boost profits on a lump sum contract. However, if they underestimate the cost of the project, they can lose profits. Sometimes, contractors will utilize inferior materials and produce a lower-quality product to artificially save costs and increase profit.
Time and Materials
A time and materials contract bills the buyer at an hourly rate and charges them for material expenses. This contract is advantageous for contractors because they do not have to estimate the cost of completing a project like in the lump sum contract mentioned above. As we already explained, an unskilled estimate can result in severely depleted profits or massively inflated building costs. The buyer benefits because they only pay for the hours being logged by the contractor. However, there are two drawbacks associated with logging hours. Contractors can log unworked hours to increase their profit, or work slowly to boost the amount of time spent working on a project.
Understanding the differences between common construction contracts can help you make mutually beneficial deals with buyers and ensure that both parties are pleased when a project is completed. In part two, our team will examine two more types of construction contracts: design-build and unit price.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.