Types of project contracts

If you need to build something, such as a house, office, barn or warehouse, you can hire a contractor to handle the project and he will take care of the construction. You and the contractor enter into an agreement or a project contract, which explains in detail what you are going to pay, how much you will pay and how much the contractor will earn for your share of the work. You and the contractor are free to negotiate any agreement that best fits your specific project. However, the most common types of project contracts include; flat rate or fixed price, maximum guaranteed price, plus costs, and price per unit or unit price.

Single or fixed price payment

The flat-rate contract, also commonly known as a fixed-price contract, is the easiest to understand. You and the contractor agree on a fixed price and you pay that price for as long as the project ends up costing. Example: You hire a contractor to build your house for $ 300,000. If the construction ends up costing $ 215,000, the contractor maintains the difference of $ 85,000 as an additional benefit. However, if the project costs $345,000, then the contractor suffers a loss of $ 45,000, since you pay the agreed figure of $ 300,000.

Maximum guaranteed price

The maximum guaranteed price project contract sets a limit on the amount you agree to pay the contractor. If the project costs less, you pay less. If the project costs more, you pay the agreed maximum price and the contractor suffers the loss of excess.

Example: You hire a contractor to build a house for the maximum price of $ 300,000. If the house costs only $ 215,000, you pay $ 215,000. But if the project costs $ 345,000, you still pay only $ 300,000, and the contractor will have to pay the excess of $ 45,000 as a loss.

Additional cost

In the cost contract plus the project, you agree to pay the actual cost of the project, plus a fixed amount of profit for the contractor. Example: You hire a contractor to build a house for the real cost, and you also agree to pay the contractor an amount equal to 10 percent of that actual cost. If you build your house costs $ 300,000, you will pay the contractor another $ 30,000, making the total price $ 330,000. Alternatively, you can agree to pay the actual costs plus a fixed fee specified by the contractor. For example, if you build your house costs $ 300,000 and you agreed to pay the contractor $ 20,000 the total costs would be $ 320,000.

Price by unit

With this agreement, you agree to pay a certain amount of a specific unit of construction. For example, you can agree to pay a certain amount per square meter of the entire project. Or you can pay a certain amount for each part of the project, such as frames, electricity, plumbing, ceilings and completion of work. In this way, if you decide in the middle of the project that you want to double the square meters of a house or office, you can do it, of course, it will only cost you an extra of the amount indicated.

Example: You hire a contractor to build a house for $ 70 per square foot. Do you want $ 2,000 square feet? You will have to pay a total of $ 140,000. Alternatively, you can agree to pay $ 4 per square foot for framing, $ 3 per square foot for electrical wiring and plumbing, and $ 2 per square foot for painting and finishing work.

Other options

The contracts for the projects described in this article are not your limitations, but simply offer some examples of how projects are usually built. You and the contractor must negotiate any agreement that best fits your project and your relationship. It may include items from two or more of the contracts described in this article, or it could be something completely different. The point is that you are free to negotiate any contract you want, and you should use these as examples, not restrictions.