A construction project is a complicated process that requires substantial investments in time and money from various parties. From securing the necessary permits to acquiring materials and dedicating time for experienced professionals to complete tasks, construction projects can quickly become stressful.
It is critical for both parties to amicably agree on what is expected, within what timeframe and how compensation will occur. For this purpose, contracts are used to define the scope of the project. However, certain professionals or industries will prefer specific types of contracts, and it is vital that all parties remain informed of how those contracts work before agreeing to their terms.
Why Attorneys Are Important for Contracts
Whether you are drafting a contract or considering signing one, working with an attorney is always a wise investment. Attorneys that specialize in contract law can help you to review a contract you are considering signing or draft a contract for the other party to review.
One of the most useful services a contract attorney can provide is guidance on enforceability. Some contracts are not enforceable, even if they have been signed. This may be due to language that is unclear or terms that were improperly used. An attorney can advise you about whether enforceability will be an issue with your contract.
Additionally, attorneys can work with you to explain terms. Contracts can contain confusing legal language, and it can be difficult to parse meaning and intent if you are unfamiliar with the common language of contracts. Legal language can often differ significantly from everyday language, and if you do not understand the terms you are drafting or agreeing to, you may make a costly mistake.
No matter which side of a contract you are on, you must clearly understand all of the terms. Otherwise, you may find you have consented to, and bound yourself to, agreement terms you did not intend.
Unit Pricing Contracts
Construction contracts come in many forms. Among them, unit pricing contracts are among the most common. Unit pricing refers to agreeing to a set price for a product that can be sold in units.
When it comes to drafting and signing contracts for unit pricing, the contract serves to verify fair pricing. Unit pricing works per unit, so buyers can see that they are being charged the correct price through simple math. This information should be included in the contract, and it should be documented clearly so that there is no potential for disagreement about the established unit price.
Non-unit pricing can vary depending on the service or material; imagine, for example, that you would like to purchase bricks. Some companies may charge different prices depending on how many you buy, the material they are made of and other factors. This is why many companies prefer to draft unit pricing contracts: they always know exactly what they will pay, and the supplier can similarly make appropriate plans.
Another benefit of unit pricing is that it is easily scalable. Sometimes, it can be difficult to fully grasp how a change in scope will impact the final price; if one set of bricks costs $X and the next set costs $Y, perhaps due to timing or quantity, there is no way to know how much another order will cost.
With unit pricing, when the scope of a project changes, pricing is easy to change. If you are certain that bricks always cost $X, you can calculate how much another order will add without waiting for feedback on current pricing. This reduces conflict during project alterations and speeds up the process of making changes.
Because of this, unit pricing contracts are predictable. Buyers can immediately calculate what the price will be, meaning that they can make decisions without feedback and suppliers need not spend time repeatedly drawing up estimates.
Lump Sum Contracts
Lump sum contracts are another common type of construction contract; this variety is best used when the scope and schedule of the project have already been agreed upon.
In a lump sum contract, the risk shifts to the builder. Because the client knows what they want, it is the builder’s job to complete the task. Builders should not be taken by surprise since all of the contract stipulations, timelines, materials and more should be included in the original contract that they reviewed.
Failure to complete the task on time or within the scope may see the builder faced with repercussions pursuant to the contract. The contract will typically state which types of damages a builder may face if they fail to uphold the promises they agreed to when they signed; this may include paying for replacement materials out of pocket or putting a cap on the amount charged over time.
The contract can build in incentives or damages, which is where an attorney can provide valuable assistance. Incentives or bonuses may be provided for early completion to encourage the builder to finish a job quickly.
Similarly, penalties may be levied for going over budget or over schedule, since the client offering the job will likely be inconvenienced or lose money as a result of failure to adhere to a schedule. Always read a contract thoroughly to understand what types of incentives and consequences you are agreeing to.
Disputes can result from a disagreement on what is considered to be “complete” after the project. For example, if a builder believes that their work is done but the client does not think that the task is completed, conflict may arise. It can be difficult to get money back for work not completed, making it important to clearly detail what completion means in the contract itself.
Time and Material Contracts
Lump sum contracts are common because they are a regular part of discussions on projects where the scope and goals are already determined. However, when the scope of a project is not clear, a special type of contract can be drafted to regulate costs.
Clients or builders will not always know ahead of time how a project will need to change and adapt. Time and material contracts serve to help parties agree upon a rate type and amount that persists for the duration of the work.
The client and builder may, for example, agree on hourly payment so that the contract can continue as long as it needs to at a consistent rate. Similarly, they may opt for payment per day to assist with planning.
When considering how to successfully utilize a time and material contract, it is vital that both parties agree on how much will be paid and whether there is a budgetary limit. They must also work together to plan additional costs.
Additional costs can come from many situations. Direct costs arise from purchasing materials and funding other expenses. Indirect costs can be calculated from missed opportunity and intangible effects. Parties must also evaluate markup costs and any overhead needed to complete the project.
Cost Plus Contracts
In some situations, the most effective type of contract is a cost plus contract. This type of agreement has the client paying for all of the actual costs and expenses of the project. The “cost plus” element of the contract means that clients will always pay for all of the builder’s costs, but they will also add other types of payments depending on the contract that they sign.
Most commonly, a cost plus contract is established with a negotiated amount that covers overhead. Usually, this is a percentage of labor and materials so that builders can simply get to work rather than worrying about billing. Everything that they buy should be covered under the umbrella payment that was decided in the contract.
There are several types of cost plus contracts. Cost plus with guaranteed maximum and bonus sets a cap on the amount that a builder can spend which allows a client to properly plan their finances. However, the client chooses to include a bonus if the project is completed early or another benchmark. Cost plus with guaranteed maximum works similarly, though a bonus is not necessarily offered.
Cost plus fixed percentage contracts (and their similar cousin, cost plus fixed fee contracts) pay the builder for the cost of the work, and they also include an additional payment for the builder’s services. Depending on the type of contract, this may come in the form of a percentage of total payments or as a lump sum fee paid to the builder.
Cost plus contracts may seem to be a little less specific budget-wise at the beginning; therefore all parties must work together to reach an amicable agreement about the total scope and budget of the project before it begins.
Trust the Professionals to Ensure Your Contract Is Enforceable
If you are working with a construction contract, either as the client or the builder, you should have it reviewed by a legal professional. The right type of contract for you, as well as the terms contained within, will vary depending on your specific project needs and goals.
The attorneys at KPPB LAW would be happy to clarify the terms of the contract and inform you about whether it is enforceable, as well as how to handle any disputes. Contact our office to schedule a consultation.