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What is a construction contract?


They are legally binding agreements signed by two parties bound by a stipulated guideline of policies and conditions to execute a construction project. Construction contracts ensure that every participating party is aware of their thoughts and obligations. Construction firms like Miller-Tippens Commercial Construction in OKC and Tulsa, Oklahoma, are continually bidding for contracts. Moreover, an increasing number of individuals are investing in the real estate sector, thus needing a legal framework that guides construction processes while offering you security and protection. A construction contract gets this job done.

Types of construction contracts

Every construction project is different in its own unique way. Each one has its particular stipulations concerning the owner and the contractor. Therefore, it is tantamount that you choose the contract type that best suits your project. A bad contract is an open door for lawsuits and loss.

Usually, construction contracts are categorized depending on the method of payment to the contractor. Let us discuss the main categories.

  • Lump-sum construction contract

If you are planning to embark on a project whose scope is well defined at the design stage with limited flexibility for modification during the construction process, consider having this fixed price contract.

Here, the contractor’s bid has a single fixed price that covers all activities in the project scope. The project’s value is determined by estimating overall project costs from drawings and the contractor’s profit. All risks associated with the project rest solely on the shoulders of the contractor.

These kinds of contracts provide an incentive for the contractor. An early finish gets a reward; a late finish is penalized.

  • Unit price construction contracts

A unit price contract allows you the benefit of beginning the actual construction of your project before the final designs are completed. It has more flexibility for design changes.

The total cost is calculated from the price of each unit’s item. However, it is essential to note that this contract has a loophole that is explored by devious construction companies. The total cost of the project will be uncertain during the start-up stages of your project.

Risk is shared by both the contractor and owner.

  • Target cost contracts

Here, payment to the contractor is based on the actual cost and a fixed, or percentage, fee of the project’s total cost. The owner sets a target cost that shouldn’t be exceeded.

Risk carried by the contractor.

  • Cost-plus contract

Also known as a thing and materials agreement. The contractor fee comprises of the project’s cost plus a fee. As with target cost contracts, they offer more predictability for contractors since owners can make design changes along the way. However, owners have the least control over costs, which can make it challenging to get construction financing.

Food for thought

It is vital to have a written contract to govern any economic transaction by outlining the business relationship and scope of work. Ensure the agreement provides a thorough description of your project. Confirm the contractor’s ability to obtain all the necessary permits. Most importantly, identify red flags in poorly-written contracts to avoid a breach of the law.