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What type of construction contract should I use?

Contractors in California who own and run their businesses need to be more than just experts in their field of construction. They also need to be savvy about how they operate their business. An essential part of ensuring that a construction project will be profitable is the contract. Selecting the right type of contract for the job and outlining all provisions appropriately is a must.

Multiple contract types

There is a myriad of ways that a contractor may structure an agreement with a customer. As explained by Associated Builders and Contractors, Inc., different contract types come with unique sets of advantages and disadvantages for a contractor. Some contracts will be more appropriate for different types of jobs.

One type of contract is the lump sum, or the stipulated sum, contract. In these agreements, the contractor agrees to a set price for all work regardless of what the actual costs or time end up being. There is clearly a high level of risk here for the contractor as a job that ends up taking more time or requiring greater materials investment than original expected could end up returning little to no profit.

A cost plus contract allows a contractor to be paid for the actual costs incurred with a job plus either a fixed fee or percentage of the total job costs. These contracts may even outline a guaranteed maximum.

A unit price cost might be most commonly used when performing repair or maintenance work or when hiring subcontractors. This allows a contractor to be paid based on a specific trade or type of work.

An incentive contract defines a specific goal and pays the contractor based on the attainment of that goal. The goal may be related to the costs, timing or quality of the project.

Important contract provisions

According to The Constructor, a construction contract should clearly outline the scope of the project and define all work to be performed. Payment terms and schedules should also be detailed in a contract.

For each job, the customer and the contractor should have defined responsibilities and rights and these should be documented in the contract.

Another important element to include in a contract is any agreement regarding how project delays may be handled should they arise. The nature of how these are addressed may be different based on the reason for the delay. Finally, a construction contract should specify what type of, if any, warranty the contractor will grant to the customer once the work has been completed.

Construction contracts are legally binding documents

There can be a lot on the line for a contractor when entering into an agreement with a customer. It is recommended that contractors work with experienced attorneys to ensure that their contracts provide appropriate protection for their businesses.