Knowing the types of construction contracts helps you confidently navigate the vast world of construction. For every kind of construction project, there is a set of rules that may affect everything from timelines. In this blog, you will learn the different types of construction contracts and best practices for managing them to simplify your construction process.
What exactly is a construction contract?
A construction contract is an agreement between the owner and the contractor. It provides information on the scope of work to be accepted, deadlines for the construction project completion, individual liabilities, and payment agreements.
What are the different types of construction contracts?
Construction contracts are of different types.
1. Lump sum contract:
The general contractor accepts the job at a pre-specified price, which covers his aggregate charges.
- Pros: It is budget-friendly which decreases unnecessary costs and helps a contractor perform better.
- Cons: Limited flexibility for changes once the design has started.
2. Cost- plus contract:
The owner agrees to pay all the design costs plus redundant charges for the general contractor's profit.
- Pros: It is harder to make changes that could improve the quality of work.
- Cons: The final cost can not be estimated; it may affect advanced costs.
3. Time and accouterments agreement:
The owner is charged the true cost for equipment and labor plus a fresh preset figure.
- Pros: Suitable for systems with undetermined reaches and easy to acclimatize.
- Cons: It can be more precious and requires close monitoring to control costs.
4. Unit price contract:
The design is divided into units, and the general contractor gets paid a fixed price per unit.
- Pros: Good for repetitive tasks and easy to gauge.
- Cons: Final cost can be hard to predict and there is a threat of increased costs if units exceed estimates.
5. Guaranteed maximum price contract:
The factual cost plus the amount is the payment given to the general contractor and is limited to the highest price in the payment.
- Pros: Limits the owner’s fiscal threat and encourages effectiveness.
- Cons: The contractor may cut corners to stay within the cap, leading to lower-quality work.
6. Design-figure contract:
This contract handles both design and construction, streamlining communication and responsibility.
- Pros: Faster design completion; single point of responsibility.
- Cons: Lower owner control over design, which can lead to potential conflicts of interest.
What are the best practices for managing construction contracts?
It is challenging to manage construction contracts without detailed planning. Here are some best practices:
1. Seamless contract setup:
Scope, timeline, and payment terms should be clearly defined so the parties do not misunderstand anything. Standardizing the templates ensures they are consistently error-free.
InnPMIS allows the automation of contract creation and workflows using interactive templates, keeping all design agreements organized in a central depository.
2. Streamlined contractor selection
Implement a thorough vetting process to ensure contractors are qualified and reliable. Use criteria such as past performance, financial stability, and compliance with industry standards.
InnPMIS helps assess contractor performance with evaluation tools that allow smooth collaboration and effective decision-making from the launch.
3. Transparent cost tracking:
Enable real-time cost monitoring to ensure alignment with the budget. Provide detailed reports on labor, materials, and other expenses to ensure accountability and transparency.
Inncircles’ automated operation tracks costs across contractors in real-time and ensures cost-effective budgets. The system automatically validates against work certifications to ensure that only approved work is paid for.
4. Integrated communication tools:
Implement direct communication between owners, contractors, and other stakeholders to ensure all parties can access up-to-date information and collaborate effectively.
InnPMIS keeps contractors, and stakeholders aligned on one platform. Share real-time updates, documents, and delineations to ensure flawless communication and collaboration.
5. Risk mitigation and compliance:
Use predictive analytics to identify potential risks in construction project execution and ensure all contracts meet regulatory and legal compliance standards.
6. Centralized document management:
Store all contract-related documents securely in a cloud-based system for easy access and sharing of information with authorized users.
InnPMIS allows you to store, track, and manage RFIs, submittals, change orders, and construction documents secured in one place, ensuring everyone works with the latest versions.
7. Performance analytics:
Leverage performance metrics and analytics to evaluate the efficiency of the construction project under the selected contract type. Use insights to refine strategies and improve outcomes for future projects.
Inncircles’ product automatically collects data and generates reports that give a clear understanding of performance, costs, and timelines.
Wrapping up
Understanding the various types of construction contracts and implementing them in your construction projects is crucial for successful project execution.
Are you excited to set up your contracts with construction management software? Why wait? Inncircles is here to help you set up different types of contracts. Click below to register for a demo.