There are plenty of frustrating things to deal with throughout a construction project. Having to get a degree in order to understand construction contracts should not be a part of the list. An honest contractor will suggest the type of contract best suited to the type of project, and the one most fair to all parties.
The type of contract offered by a General Contractor will generally be like one of the following. Rarely should other types of contracts be considered for the scope of work required for a small to medium-sized assembly project:
Lump Sum
The Contractor agrees to build a project with a specific scope for a fixed price. The price is determined by estimating labor costs, material costs, and adding overhead and profit. The Contractor assumes all of the risk in a Lump Sum contract, so he may ask for a higher markup to cover unforeseen costs; however, he has greater control over profit.
A lump sum contract is suitable if the scope and schedule of the project are sufficiently defined to allow the contractor to fully estimate project costs. This type of contract requires a fully developed, well-detailed set of Architectural plans for an accurate estimate.
Cost Plus
This type of contract is favored where the scope of work is indeterminate or highly uncertain, and the kinds of labor, material, and equipment needed are uncertain. It is also appropriate if the budget is restricted or when it is likely that the actual cost might be reduced.
A Cost Plus contract may or may not include a Guaranteed Maximum Price (GMP), or the contract may be a GMP contract as seen below.
Guaranteed Maximum Price
A GMP contract is an agreement in which the contractor is compensated for actual costs – as in the Cost Plus contract – plus a fixed fee subject to a maximum price. Cost overruns are the contractor’s responsibility, unless the GMP has been increased through executed change orders resulting from the client’s change of mind. Savings resulting from cost savings are returned to the client.
There are a number of issues that should be addressed in every construction contract. Some of these are Scope of Work, Allowances, Retainage, Insurance, Hidden Conditions, Change Orders, Warranties, Substantial and Final Completion.
We can provide the necessary information to formulate appropriate questions for contractors, or speak with them on your behalf.
Remember, if you don’t understand it, don’t sign it! Call us before you begin planning your project.
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