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Types of Contracts in Construction: Lump Sum, Cost Plus, Time and Material, Unit Pricing

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Added on  2019-09-25

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This article discusses the four types of contracts in construction: Lump Sum, Cost Plus, Time and Material, and Unit Pricing. It explains the advantages and disadvantages of each type of contract and when they should be used. The article also provides information on the specific details that should be included in each type of contract.
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There are four types of contracts related to construction. They are given below:Lump Sum or Fixed Price Contract TypeThis type of contract involves a total fixed priced for all construction-related activities. Lump sum contracts can include incentives or benefits for early termination, or can also have penalties, called liquidated damages, for a late termination. Lump Sum contracts are preferred when a clearscope and a defined schedule has been reviewed and agreed upon. This contract shall be used when the risk needs to be transferred to the builder and the owner wants to avoid change orders for unspecified work. However, a contractor must also include some percentage cost associated with carrying that risk. These costs will be hidden in the fixed price. On a lump sum contract it isharder to get credit back for work not completed, so consider that when analyzing your options.Cost plus ContractsThis type of contract involves payment of the actual costs, purchases or other expenses generateddirectly from the construction activity. Cost plus contracts must contain specific information about a certain pre-negotiated amount (some percentage of the material and labor cost) covering contractor’s overhead and profit.Costs must be detailed and should be classified as direct or indirect costs. There are multiple variations for Cost plus contracts and the most common are Cost plus Fixed Percentage, Cost Plus Fixed Fee, Cost Plus with Guaranteed Maximum Price Contract, and Cost Plus with Guaranteed Maximum Price and Bonus Contract.Cost plus contracts are used when the scope has not been clearly defined and it is the owner responsibility to establish some limits on how much the contractor will be billing. When some of
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