If an owner decides to use a lump sum contract for a project, builders can usually charge a higher fee to account for the additional risk they are taking. Otherwise, unforeseen costs can affect a builder`s results or lead to a project that may not be completed as planned. Under a lump sum contract, a “fixed price” for the work to be carried out is agreed between the client and the contractor before the start of the work. This contract can also apply to both residential construction and commercial contracts. This can pose a greater risk to the entrepreneur because there are fewer mechanisms that allow him to vary his price. Understanding the different types of construction contracts will help you decide which type is right for you and your project. In addition to the contract, there are many other moving parts to consider, such as the amount of work you need, the design technology you should consider, and the most important machines you need for the job. Consider implementing value engineering in your next project to weigh cost and material options and ensure you get the best value for money. Take a look at our heavy equipment catalog to see through your rental options. When it comes to cost-plus contracts, most of the risks are placed on the owner.
This is because the contractor is paid for all costs incurred during the project and all unforeseen expenses come out of the owner`s pocket. For this reason, cost-plus contracts are best suited for projects that require a lot of creative flexibility. A flat-rate contract sets a certain price for all the work carried out for the project. These construction contracts are also referred to as “fixed-price contracts” or “agreed-sum contracts”. Costs plus contracts are generally used when the scope of work, materials, work and equipment is not clearly defined or difficult to estimate from the outset. Projects that use this type of contract are more likely to be completed as planned, as builders are not completely limited by cost. However, this type of contract is more complex to manage and requires close monitoring. In the case of a lump sum contract, all work is carried out according to the plan and specifications by the contractor for a certain fixed amount in accordance with the agreement. The owner provides the necessary information and the contractor charges a certain amount. This contract is appropriate if the number of positions is limited or if it is possible to determine exact quantities of the work to be performed.
Detailed specifications of all work objects, detailed plans and drawings, deposit, contractual penalty, advancement and other contractual conditions are contained in the agreement. Although it is a lump sum and a planned contract, the contractor is paid at regular intervals of 2-3 months depending on the progress of the work on the basis of a certificate issued by the engineer in charge. A scheduled price is included in the agreement to pay for additional items. Incentives are sometimes built into these contracts to reward the manufacturer if the order is completed prematurely. These agreements may also include penalties, sometimes referred to as “lump sum damages,” for an order that is executed late. Owners typically use these types of contracts to avoid change orders for additional or open-ended work. Costs plus contracts typically require the owner to pay all project costs, such as material costs, labor costs, and other project costs. In addition, these types of contracts also include an agreed amount or percentage that covers the builder`s overhead and profits, which the owner also pays.
Costs must be classified as direct, indirect, surcharges and overheads and must be included in the contract. Sometimes the owner may want to set an upper limit or a specific project duration for the contractor that must be respected to minimize the owner`s risk. These contracts are useful for small areas or when you can make a realistic estimate of how long it will take for the area to close. Under a lump sum contract, an owner agrees to pay a certain lump sum to a contractor after the completion of the work without a breakdown of costs.   Once the work is completed, no detailed action is required. At its core, every construction contract is an agreement. You and the tenant should discuss the parameters of the project to reach a common conclusion on the best type of contract. In the end, both parties also benefit from a good contract. As you can see, lump sum contracts carry some risk for contractors because they do not take into account unforeseen costs or delays after the project starts.
Missteps mean you make less money or, even worse, lose money on a project. Depending on the type of cost plus the contract, the owner may end up paying more than expected and therefore generally take a higher risk than the builder. When signing a lump sum contract, the builder takes an additional risk because the owner is not obliged to pay more than the initial price if the project goes out of scope, if problems arise or if other changes occur during the project. Some lump sum contracts take this into account by including separate indemnities covering costs and unforeseen changes. A package is an order that contains a series of exchange or deposit items that must be completed at the same time or not at all. Package offers allow traders to secure specific prices or maturity dates for multiple assets. However, the planning team, usually advised by the cost consultant, may choose to pre-empt a general contractor by selecting specific systems needed to quickly participate in the evolving design. This creates a built-in package request.
The Earned Value Management Manual, published by the Association for Project Management in March 2013, suggests that work packages are: “. the lowest level at which performance data is typically analyzed. It is therefore important to weigh the length and scope of the work package against the length of the report cycle and to determine when and how a “value” can be achieved. Each work package must have a clearly defined starting condition and a clearly defined end point, with all deliverables defined. The scope of each work package must be clearly defined, specifying the procedures to be followed. Each work package includes a set of activities that must be carried out. This type of contract involves the payment of actual costs, purchases or other expenses incurred directly from the construction activity. Cost Plus contracts must contain specific information about a certain pre-negotiated amount (a certain percentage of material and labor costs) that covers the contractor`s overhead and profits.
Costs should be detailed and classified into direct or indirect costs. There are several variants of Cost Plus contracts and the most common are: IDAL`s package contract promises incentives to an investor, including taking into account the unpredictability of a particular construction project, the owner bears a significant risk with time and material contracts. This is because they are required to pay the contractor for unforeseen costs, modifications or waiting times that occur during the project and cost them more than originally anticipated. A global contract can also be used to attract potential investors for large construction projects that would benefit a local economy. For example, the Lebanese Investment Development Authority (IDAL) offers a global contract with incentives for investors. They offer investment incentives based on the potential capital investment of an investment project, the number of jobs created and the type of sector of the project. Guaranteed maximum prices are a common feature in construction contracts and are best suited for projects with few unknowns. For example, building a retail chain with plans that have been used time and time again. .