Construction projects are often complex to manage. From financial planning to personnel organisation, there are many moving parts that make a construction project work. Contracts are one part of that wider picture that help make construction projects run smoothly.
As no two construction projects are the same, construction projects are able to utilise a contract that works for them. There are numerous types of construction contracts which we cover today.
You’d need a contract when creating estimates, bringing on subcontracts and helping with the overall goals and needs for the project.
The Types of Construction Contracts
Construction projects aren’t one-size-fits-all, which is why there are so many different types of contracts available. Construction contracts contain elements of contract law, as well as specific parts taken from construction laws, including Part II of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996) and Part II of the Scheme for Construction Contracts (the Scheme).
1. Cost-plus contracts
In a cost-plus contract, the contractor is paid for all of the construction related expenses, including any parts or materials provided. Then, plus all the costs, the contractor will receive a predetermined amount of profit as well.
What are the benefits of cost-plus contracts?
As there’s no risk of losing money on supplies or in general, this contract type especially benefits the contractor as they can feel confident in making a profit. It also allows a company to be less clear in their scope, as the contractor knows no matter what, they will be paid the correct amount.
What are the downsides to cost-plus contracts?
Cost-plus contracts require intense administration work. For every party involved a list of costs and expenses are needed in full to fulfil this contract type. Tools like RedSky’s construction financials module help to make cost management as simple as possible.
2. Design-build contracts
A design-build contract pulls both parts of the process into one contract. Traditionally, tenders are put out for design, then a separate tender is put out for the construction work. In a design-build contract, all of the tenders fall under the same contract. This means that construction work often starts before the designs have been finalised.
What are the benefits of design-build contracts?
The main benefit here is time saved. A design-build contract allows for a quicker, more streamlined process, and avoids less disputes between the constructor and the designer. It also allows for a more collaborative approach, ensuring that the overall vision is achieved swiftly.
What are the downsides to design-build contracts?
Cost management can be the trickiest part of a design-build contract. As there’s no competition in the second part of the process, costs can be higher overall. Cost estimation can also be trickier as there may be changes made in the process that haven’t been accounted for. RedSky’s estimating and surveying module can help monitor these costs as the project moves along.
3. Construction management contract
The JCT Construction Management contract is widely used across the construction industry. It’s for use on projects where there’s numerous tradespeople involved in different aspects, but a separate construction manager that oversees the work for a fee.
What are the benefits of construction management contracts?
A construction management contract offers greater visibility to the project management team or client as the construction manager can provide clear visibility of the work completed. It can also fast track projects as the construction manager is able to ensure delivery of the work, but isn’t held liable for a tradesperson’s issues or mistakes.
What are the downsides to construction management contracts?
As the construction manager isn’t liable for the work or cost, it can be a risk that a project may run over, either in cost or time. Similarly, due to the way a construction management contract works, the final cost might not be known until the end of the project.
4. Lump sum contract
A lump sum contract is one that is delivered at a fixed price with no changes. It’s commonly used for straightforward work, often with smaller construction projects. When projects have a well-defined scope a lump sum contract is often the best choice, as there’s clear transparency in the whole process.
What are the benefits of lump sum contracts?
For all involved in the project, the main benefit is clarity of cost. There’s less risk of discrepancies in cost, as these have all been predetermined. For the contractor involved, they’re able to work clearly to a set financial cost.
What are the downsides to lump sum contracts?
If there’s a risk of changes being requested, or material supply issues, then a lump sum contract can be restrictive. As such, it’s not great for more complex projects that require the flexibility to make changes as it progresses.
5. Time and materials contract
In a time and materials contract, the owner pays a set price for the time used and a set price for the materials used. This is also called a day rate colloquially. Similarly to lump sum contracts, time and materials contracts work well for straightforward contracts, but they allow for more flexibility when issues arise like material availability.
What are the benefits of time and materials contracts?
As mentioned above, one of the main benefits of time and materials contracts is the additional flexibility. If a project takes more or less time, the total project cost is updated. This requires good cost management skills on the construction manager’s behalf.
What are the downsides to time and materials contracts?
This contract’s biggest benefit is also its downfall. With added flexibility comes the added risk of project costs mounting up. There is the potential for costs to eat into profit margins. To mitigate this, construction professionals can use RedSky’s software, including the CVR module, to help mitigate the cost of the project.
6. Guaranteed maximum price contract
A guaranteed maximum price contract is essentially a cap on how much can be spent. For the client, this means they don’t have to worry about costs going over and means the contractors involved know what they can spend and work towards a shared goal.
What are the benefits of guaranteed maximum price contracts?
The main benefit is transparency. Everyone involved knows what can be spent and therefore there is minimal risk of discrepancies in the process. Similarly, contractors involved may be more driven to work efficiently to boost their profits on the project.
What are the downsides to guaranteed maximum price contracts?
In order for a guaranteed maximum price contract to be successful there must be a considered effort on cost reporting and analysis. Without this, there won’t be any certainty that a project has actually met the financial goals. RedSky’s Construction Financials module helps to make this side of the project simple to carry out.
Make construction cost management simple with RedSky
When it comes to managing contracts, you need to be aware of cost management. See how RedSky can help by requesting a demo with one of our expert team today.
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