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Understanding construction contracts in California

Understanding the different types of construction contracts may help ensure contractors’ rights are protected and their obligations are clearly defined.

New construction and renovation projects are under way on buildings across the state of California almost daily. Often, construction contracts are essential to seeing the visions for commercial or residential buildings coming to fruition. These types of legal agreements generally take on one of four forms – fixed price, cost-plus, time and material or unit pricing. In order to help ensure they are protected and that they understand their contractual obligations, it is important for contractors to be familiar with construction contracts.

Fixed price contracts

Fixed price contracts are commonly used for construction projects and in other service-based businesses. With such arrangements, the contractor and the client consent to a set cost for the performance of specified services. Customers often prefer these contracts because they offer transparency and allow them to better budget for the cost of the project. When considering fixed price contracts, contractors should keep in mind they may lose money on a project if issues arise or if they underestimate the costs for their hours or materials.

Cost-plus contracts

Especially when the scope of a project is not defined, contractors may choose to use cost-plus contracts. Under these types of service agreements, the property owners are responsible for the actual costs of the project, including the materials, as well as for the contractor’s profit and overhead. In most cases, the contractor and client will pre-negotiate a spending limit and specify this restriction in the contract.

Time and material contracts

When the magnitude of a construction project is unclear or undefined, property owners and contractors may agree to time and materials contracts. Through such arrangements, the clients pay the costs of the materials, in addition to an hourly billing rate. The hourly rate generally includes wages, profit, general and administrative expenses, and other indirect costs.

Unit pricing contracts

Most commonly used for road building, public works and engineering projects, unit pricing contracts may also be employed for some other construction projects. With these agreements, prices are set for a pre-specified task or scope of work. When used on vertical-building projects, unit pricing is often combined with fixed price contracts. For example, the owner of a property may agree to pay a contractor a lump sum on top of a stipulated amount for each additional window or door opening in the project.

Seeking legal guidance

It is important for California construction contracts to protect property owners’ interests, as well as contractors’ businesses. With the different options available and the complexities involved, it may be difficult to know which form is best for a given project. Therefore, it may benefit property owners and contractors alike to consult with an attorney before entering a contract. A lawyer may help explain their rights, options and obligations.