Which Contract Type Works Best For Me?
As a homeowner, funding a project and expecting a certain outcome can be stressful. Your residential concrete contractor, custom framer, or general contractor can be on site (your house) for weeks or even months at a time, working to complete specific goals. What are your goals? Well, some easy ones to understand are getting the best quality, for the least price, while mitigating as much risk as possible. However, wouldn’t the contractor just want the opposite? To do the least amount of work, for the highest price, and taking on no risk? Rest assured that most contractors have a vested interest in taking proper care of you and your project, as it will reflect on their success as a company. The best way to find middle ground, and to help ensure you’ve found a great partner for your project, is through a detailed, well written and understandable contracts. They should indicate the scope of work, have clearly defined goals and benchmarks, as well as prices and payment plans. There are quite a few different types of contracts out there, listed below are 3 of the most common types of contracts between private homeowners, and their contractors.
1. Fixed Price (Lump Sum) Contracts
These types of contracts are by far the most common business contracts you will find between contractor and client. Through clearly defined steps and research, the project will be boiled down to one price, usually divided into portions at the beginning, middle and end of a project, or at clearly defined benchmark goals. These contracts require that all objectives are accounted for in the bidding process, as the contractor takes on most of the associated risks. If there is something he/she didn’t account for, they would be held accountable to fix it.
Pros.
Contractor takes on all benefits, and losses.
Owner has cost-certainty. Little or no fluctuating costs.
Cons.
Tends to be more expensive for the clients
Cannot begin construction as quickly
Relies heavily on well defined objectives. Changing objectives during construction (change orders) can quickly become expensive.
2. Cost Reimbursable (Cost Plus).
Like the name suggests, the contractor delivers a project for his/her cost, plus a specified percentage of profit. While some customers would lean towards this for its simplicity, keep in mind that the owner takes on most of the associated risks, and this contract type has the least cost certainty.
Pros.
Potentially less expensive than other contracts. For example, in a Lump Sum contract, the contractor will take into account his/her risk involvement, and charge fees accordingly, increasing the final price. In a Cost Plus contract, with lower risk allocated to the contractor, those associated fees can be lowered.
Cost Plus contracts require transparency in relationships to be effective. The contractor would have to share costs associated with the owner’s project.
Cons.
Owner takes on most of the risk
Costs and final price stays fluid and can fluctuate.
3. Target Price Contracts
This is an interesting one, that helps to encourage both parties to work together to keep costs down. It works like this:
The contractor and owner agree on a “target” price
The contractor gets paid for their actual costs during the project.
At the end of the project, both parties compare the actual costs to the target price, and then share in the savings, or losses. Usually in pre-determined percentages.
This contract can be useful when it is difficult to accurately price out a project, or the project exists in difficult conditions. It helps to reduce risks on both sides, while encouraging transparency and teamwork to help keep costs down. This type of contract is not all that common in the private sector, but is definitely an interesting one to think about.
It should be noted that in any contract type you sign, there should always be detailed scopes of work, time frames and benchmark goals, and clearly defined fees and payment structures. Also, make sure detailed information for both parties are included on the contract. Please know that signing a contract should never be a scary thing to do, it should be welcomed as it can be designed for not only the contractor’s safety, but for yours as well.
We appreciate you taking the time to read this quick blog, and we here at Monolith Custom Construction Inc hope you found it helpful. If you would like some more information, or have a vision for your home, feel free to reach out and contact us, and let’s get to work!