What Are the Most Common Types of Commercial Construction Contracts?

 Posted on January 21, 2021 in Commercial Real Estate

A commercial real estate development project will often represent a lucrative business opportunity for all parties involved. However, significant construction may be needed before a developer can realize the full potential of a property. Whether a new building will need to be built, an existing building will need to be refurbished, or other types of construction will be needed to ensure that a property will be able to serve its purpose, these construction projects can represent a major investment of time and money. To ensure that work will be completed properly, a construction contract will be needed, and the right type of contract should be selected based on the work being done.

Four Types of Construction Contracts

When parties sign a contract, they are making a legal agreement, and they will both be required to meet their contractual obligations. A contract should fully outline the scope of the work being performed and the responsibilities of each party. It should state the price of the project and how this amount may change if unforeseen circumstances occur, and it should detail a payment schedule and the penalties for late payments. Any relevant documents, such as blueprints and specifications, should be included in a contract.

Depending on the needs of the project, a contract will typically fall into one of the following categories:

• Lump-sum/fixed price – A contract may specify the total amount that will be paid to a contractor for all of the work performed during a construction project. This amount is usually based on the contractor’s estimate of the costs of work performed, along with a markup that will allow them to earn a profit. Since these contracts are not very flexible, they are usually used in projects that involve easily-defined work with a set schedule and little chance of changes.
• Time and materials – In this type of contract, a builder will be paid on a regular basis (usually daily or weekly) for the costs of materials and labor. These contracts are more flexible, and they are usually used in situations where the full scope of a project has not yet been defined.
• Cost-plus – A contract may specify that a builder will be paid based on the actual costs of completing a project. The builder will be reimbursed for expenses such as materials and labor, and they will also receive an additional amount, which may be a fixed fee or a percentage of the total costs. These contracts allow for flexibility while a project is ongoing, and they may protect the property owner’s interests by specifying a maximum price that will be paid.
• Unit pricing – For smaller projects or those which require detailed accounting, a contract may specify the exact costs involved for all materials and tasks. These contracts can ensure that a property owner knows exactly how money is being spent, and they allow for easy adjustment to a project’s total price if changes are needed. However, unit pricing contracts can be time-consuming to create, since they are very detailed.

Contact Our DuPage County Commercial Real Estate Attorneys

At Stock, Carlson & Duff, LLC, our attorneys are highly experienced in construction contracts and other commercial real estate concerns. Whether you are a developer or a builder, we can help you draft a contract that will meet your needs, and we can work with you to resolve any contract disputes either inside or outside the courtroom. Contact our Wheaton construction contract lawyers today at 630-665-2500.

Sources:

https://www.thebalancesmb.com/common-types-of-construction-contracts-844483

https://www.stovallconstructioninc.com/news/types-commercial-construction-contracts/