Construction Contracts Explained:

Your Complete Beginners Guide from My Build Estimate

Whilst building estimates may play an important role in the development of a construction project, it’s important to understand that these documents don’t merely exist in silo.

Rather, they play a key role in something much bigger:

That something?

The construction project contract.

Ultimately, gaining this contract is the primary objective of a building contractor, and the whole reason for investing in an estimate in the first place.

The moment a tender is issued, potential contractors will consult a professional cost planner in order to complete an estimate that is as competitive and cost-effective as possible.

If they’re successful, that ultimately means only one thing:

 

Winning the Contract

The project owner awards the contractor the job on the understanding that they will complete it in accordance with the measurements, costs, and time scales laid down in their estimate.

That’s where the construction contract comes into play, ensuring that both parties agree on exactly how the project will be completed, and, in most cases, how much it will cost and when it will be finished.

 

Why Are Construction Contract Agreements Needed?

Make no mistake about it, a building contract is much more than a vague agreement.

It is an in-depth package of documents which, depending on the type of contract and the work involved, is likely to include the following:

  • Definition of the project.
  • Agreed schedule
  • Plans, drawings, and specifications
  • Measurements and costings
  • Details of early finish incentives and late finish penalties
  • The rights and responsibilities of both client and contract
  • Payment method.

In most cases, the original Bill of Quantities produced by the build estimator, and the estimate itself will also be included in the contract documents.

 

How do Builders Benefit from Construction Contracts?

At first glance, the main reason behind a contract appears to be ensuring that project owner gets exactly what they’re paying for from their contractor.

Look a little closer however, and it soon becomes apparent that contracts are far from a one-sided affair.

Having a comprehensive package of contract documents to hand eliminates the guesswork for the project manager. In other words, they know exactly what is expected and when it is expected to be completed by.

Ultimately then, the contract allows for effective project management from start to finish, but that isn’t all it does.

Crucially, it also provides a guarantee to the contractor that they will be compensated fairly and accurately depending on the type of contract agreement they have in place.

What Are the Four Different Types of Construction Contract?

The type of contract we’ve been referring to so far is what we call a Lump Sum contract.

This is the most common type of contract, and is used when the scope of the project and all the details have been clearly defined and agreed upon.

Here, the project owner agrees to pay a fixed price (or ‘lump sum’) which covers all the project essentials including:

  • Material
  • Labour
  • Equipment hire
  • Contractor overheads.

It also includes a mark-up for the contractor’s’ profit margins.

With a Lump Sum contract, 100% of the risk of the project is assumed by the contractor. Penalties are incurred if they finish the project later than the agreed deadline, whilst they are rewarded for completing early.

 

Unit Price Construction

As an alternative, contractor and client may agree to sign a Unit Price contract, which allows for greater flexibility and enables the project to get underway before designs are finalised.

In this case, risk is shared by both contractor and project owner, with the contractor paid in accordance with the rates of items as laid out in the Bill of Quantities.

 

Cost Plus Construction

There are occasions when it may be incredibly difficult -if not completely impossible- to accurately estimate the total project costs before the actual work has been completed.

In this scenario, the project owner is likely to assume all risks and agree to a Cost Plus Construction contract.

With this, the owner agrees to pay the contractor the costs of the project along with a separate fee which accounts for overheads and profits.

 

Target Cost

Finally, we come to the Target Cost Contract, which essentially combines the main benefits of the lump and cost plus construction contracts.

In this scenario, the risk is once again assumed by the contractor, who will be paid for the costs of the project plus a fee which is dependent on the project staying within its target budget.

Should savings be made, the contractor will be paid a percentage of that amount, providing even greater incentive to work as cost effectively as possible.

 

Who Can Help With the Production of Construction Contracts?

Did you know that My Build Estimate’s skilled construction industry professionals can provide direct support and contract consultancy for a range of building projects?

 

To find out more about what we can do for your business, contact us online today, or call now on 0800 369 8977.

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