1. Cost-plus
A cost-plus contract covers the contractor’s actual project expenses plus a profit margin, which may be either a fixed sum or a percentage of the total costs. It provides flexibility for projects where the scope may change or unforeseen issues might arise.
This type of contract offers transparency and flexibility, making it easier to manage changes and unexpected conditions. However, the lack of a fixed total can lead to higher costs and less certainty about the final price. Proper construction inventory management is key to avoiding cost overruns.
2. Design-build
In a design-build contract, one entity is responsible for both the design and construction of the project. This integrated approach can help streamline communication and speed up the project timeline, as design and construction phases overlap.
The design-build method simplifies project management by providing a single point of contact and often results in faster completion. That said, it may limit your control over the design process and can potentially lead to higher initial costs due to the integrated approach.
3. Guaranteed maximum price
A guaranteed maximum price (GMP) contract limits the total project cost. The client agrees to pay the contractor up to this maximum amount, and any savings below this limit are typically shared between the client and contractor.
The GMP contract offers cost control with a fixed upper limit, encouraging the contractor to complete the project under budget. However, it might include a higher initial price to cover potential risks and can complicate the process of managing scope changes.
4. Incentive construction
Incentive construction contracts provide additional compensation to the contractor for achieving specific goals, such as completing the project ahead of schedule or under budget.
These contracts encourage high-performance and cost-effective solutions, potentially leading to savings. On the downside, disputes may arise over goal achievement criteria, and the contract may lead to higher initial costs due to the incentive structure.
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5. Integrated project delivery contract
Integrated project delivery (IPD) contracts involve all major project stakeholders—owner, architect, and contractor—in a single collaborative team. They aim to align interests and share risks and rewards among the participants.
IPD contracts foster collaboration and innovation, leading to more efficient processes and better outcomes. However, setting up and managing an IPD contract can be complex, and disagreements among team members may pose challenges.
6. Lump-sum contract
A lump-sum, or fixed-price, contract involves the contractor completing the project for a predetermined total amount. It includes all costs related to labor, materials, and overhead.
With this contract, you get cost certainty and simplified budgeting, as the total price is agreed upon upfront, but it provides less flexibility for changes. Also, a fixed budget might lead a contractor to cut corners, potentially compromising the quality of the work.
7. Time and materials contract
In a time and materials contract, the client pays for the actual time spent on the project and the cost of materials used. It’s a good choice for projects with uncertain or evolving requirements.
Though the time and materials contract provides flexibility and transparency, allowing you to adjust the project as needed, it can lead to uncertain final costs and potential inefficiencies.
8. Unit price contract
A unit price contract sets the price based on the unit of work, such as square footage or linear feet. The final cost is determined by the actual quantities of work performed.
This contract type is ideal for projects with variable quantities, providing a clear pricing structure, but fluctuating quantities can lead to unpredictable final costs. Also, discrepancies in measurements can lead to disputes over payments.