{"id":56880,"date":"2024-10-10T09:20:00","date_gmt":"2024-10-10T14:20:00","guid":{"rendered":"https:\/\/www.projectmanager.com\/?p=56880"},"modified":"2026-07-17T13:55:04","modified_gmt":"2026-07-17T18:55:04","slug":"construction-contracts-best-practices","status":"publish","type":"post","link":"https:\/\/www.projectmanager.com\/blog\/construction-contracts-best-practices","title":{"rendered":"14 Types of Construction Contracts: Pros, Cons & Best Practices"},"content":{"rendered":"

What Is a Construction Contract?<\/h2>\n

In simple terms, construction contracts are legally binding agreements that explain the work that a general contractor will perform and the payment that a project owner will make. These contracts play a key role in construction management<\/a>.<\/p>\n

However, construction projects vary greatly in terms of complexity and size, so there\u2019s not a one-size-fits-all approach when it comes to construction contracts. That\u2019s why several types of construction contracts have been developed, such as lump sum, cost-plus, time & materials (TM) and unit pricing contracts.<\/p>\n

Whichever contract type you use, ProjectManager<\/a> is project management software that can help you manage your construction projects. ProjectManager\u2019s online Gantt charts help you build detailed construction plans with costs, resource hours and dependencies, which is ideal for construction firms or contractors who have multiple contracts with owners and subcontractors alike.<\/p>\n

Make a detailed WBS on the left side of the Gantt chart to break your project into phases and milestones, then execute tasks with your team using more project views: list, kanban, sheet or calendar. There’s even a mobile app and a built-in timesheet function so it’s easy for field teams to update tasks and hours. Get started today for free.<\/p>\n

\"Gantt<\/a>
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Why Are Construction Contracts Necessary?<\/h2>\n

Construction contracts protect both parties in the agreement. These construction administration<\/a> documents detail what work will be completed, when it’ll be completed and how much it’ll cost. They also outline methods of communication and how disputes will be handled if they arise.<\/p>\n

By including information about communication and changes, construction contracts streamline the decision-making process. Ideally, project risks<\/a> have been anticipated and the contract outlines how best to proceed. A construction contract is, first and foremost, an agreement, but it serves as a roadmap of sorts as well.<\/p>\n

\"Risk<\/a>
Risk tracking template Free download<\/a><\/figcaption><\/figure>\n

Who Is Involved in Construction Contracts?<\/h2>\n

Construction contracts involve two parties; owners and contractors. Owners need a job outsourced and the contractor<\/a> executes the job. The two parties work together to draw up a contract and agree on the terms of completion and payment.<\/p>\n

Owners contract builders when they need to execute a specialized job they cannot perform on their own. They may also contract builders when the scale of the project is too large for them alone. Construction projects, in particular, often require owners to hire several different contractors. In this case, thorough construction contracts are crucial to successful project management.<\/p>\n

\"Contractor<\/a>
Contractor estimate template Free download<\/a><\/figcaption><\/figure>\n

Types of Construction Contracts<\/h2>\n

Because construction projects take many forms, different projects require contracts with different characteristics. All types of construction contracts define a timeline, budget, quality requirements and other aspects that need to be defined in every construction project. The two main differences between these types of construction contracts are how the disbursement will be made and the risks<\/a> and rewards that each party assumes.<\/p>\n

Before creating a construction contract, it’s important to know the type of contract that best suits your needs.<\/p>\n

1. Lump-Sum Contract<\/h3>\n

A lump-sum contract (also called a fixed price contract<\/a>) names a total price for the entire job. This price accounts for all time and materials regardless of changes or issues. This type of contract protects owners against unforeseen changes and setbacks.<\/p>\n

Lump-sum contracts can seem as though they favor the owner over the contractor, but there are ways to balance the scales. Many contractors charge an additional percentage for signing lump sum contracts, as they’ll be taking a higher risk. Additionally, incentive programs are often put in place by owners to reward jobs being completed early.<\/p>\n

2. Cost-Plus Contract<\/h3>\n

Cost-plus contracts are made of two parts: a predetermined fee and accumulated costs. This fee is the agreed price owners will pay contractors. It can be a dollar amount, a percentage of the total project cost or another form of payment. The defining characteristic of a cost-plus contract<\/a> is it reports expenses as they occur rather than deducting costs from a set budget.<\/p>\n

A cost-plus contract is used when construction project expenses are uncertain. While this can seem like a liability, cost-plus contracts often include incentives for coming in under budget and set caps on expenditures. This avoids conflict and ensures contractors are paid a fair overhead.<\/p>\n

3. Time and Materials Contract<\/h3>\n

Time and materials contracts are a fitting choice when the scope of a project is completely unknown. In this case, contractors charge an hourly rate for labor and for materials as needed. Because this leaves uncertainty, these contracts must be specific and prepare for almost anything. An owner should include incentives for construction projects completed ahead of schedule<\/a> and\/or under budget.<\/p>\n

A time and materials contract<\/a> is a good choice for small projects as they require close supervision. For example, all costs must be carefully monitored and classified to document them and ensure contracts are followed. As you can imagine, this becomes increasingly difficult the larger the project. The advantage of choosing a time and materials contract is it protects owners from overpaying contractors.<\/p>\n

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