Which Construction Contract Is Right For You?

Building a new home, or getting your new business location under construction is an exciting time. There’s a never-ending list of things to consider, and here at Baratto Brothers, we want to make all those considerations as easy as possible. One of the items you’ll want to pay attention to is the type of construction contract you have or are deciding to go with.

A construction contract is the agreement between you and your contractor that outlines how your project will be executed and the financial agreement the two of you make. While it may be easy to assume all contracts are made equal, this is not the case, as there are a number of different contracts used in the construction industry. Most construction contract types are defined by the way the disbursement will be made to the contractor and it also specifies the terms most people are interested in like quality and duration.

There are four construction contract types most commonly used in the industry:

  1. Fixed Price/Lump Sum – This contract is just as it sounds and used often. By utilizing this contract, your contractor agrees to handle the project as described in your agreement for a fixed price. This type of contract is best used where the scope of the construction project and its schedule are clearly defined, making estimating the project easier for the contractor.
  2. Cost Plus – With this type of contract, you’ll find it involves payment of the actual costs, purchases, or other expenses due to the construction of your project. These contracts must be very specific about pre-negotiated amounts for labor and material costs. Each cost must be identified as direct or indirect costs. This type of contract is favored when the scope of the project is extremely uncertain, or when any of the materials, equipment, or amount of labor is called into question. There can also be multiple variations of this type of contact. The most common are:
    • Cost Plus Fixed Percentage
    • Cost Plus Fixed Fee
    • Cost Plus with Guaranteed Maximum Price
    • Cost Plus with Guaranteed Maximum Price and Bonus
  3. Materials & Time – If a scope of a project isn’t clear, or hasn’t been clearly defined, this type of contract is often preferred. You and your contractor work together to establish an hourly or daily rate, and as well as determine how to handle additional expenses as they arise. All costs need to be specified as direct, indirect, mark-up, and overhead. In this type of contract, you may want to establish a cap or specific duration for the project. This is typically referred to as a “Cost Not To Exceed” contract or clause.
  4. Incentives – Incentive contracts feature compensation for the contractor based on their performance in relationship to your agreed upon schedule and timeline, quality, and overall budget. These contracts work particularly well when you have a tight deadline to adhere to. Incentive contracts can fall into two types of categories: Cost Reimbursement Incentive Contracts and Fixed Price Incentive Contracts.

Regardless of the contract you and your contractor choose to go with, be sure it’s one you can all live with. At Baratto Brothers, we pride ourselves on being able to deliver quality work on time and on budget with all of our construction projects, regardless of the contract binding us. For more information, call our office today at (218) 692-1070 and find out how we can deliver the superior craftsmanship you’ve been searching for.