Types Of Construction Contracts: Pros, Cons & Best Practices

Types Of Construction Contracts: Pros, Cons & Best Practices


Construction contracts are legally binding agreements that explain the work to be performed by a general contractor and the payment that will be made by a project owner. They protect both parties in the agreement and outline methods of communication and how disputes will be handled. Owners and contractors work together to draw up a contract and agree on the terms of completion and payment. Different types of construction contracts require different characteristics, such as lump sum, cost-plus, time & materials (TM) and unit pricing contracts. Before creating a construction contract, it is important to know the type of contract that best suits your needs.

A lump-sum contract is a total price for the entire job that accounts for all time and materials regardless of changes or issues. Cost-plus contracts are made of two parts: a predetermined fee and accumulated costs. They are used when construction project expenses are uncertain and include incentives for coming in under budget and set caps on expenditures. Time and materials contracts are a fitting choice for small projects as they require close supervision and ensure contracts are followed. The advantage of choosing a time and materials contract is it protects owners from overpaying contractors.