Digi-sign Free Construction Contract Made Easy

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understanding the different types of construction contracts is essential as they determine what you pay what you are liable for and many other aspects of the job a contract protects both the builder and the owner by ensuring expectations are clear from the beginning and avoiding potential headaches caused by overages and other unexpected issues there are many types of building contracts and they are usually tailored to the needs of the project to help you get familiar with your options we explain the differences between different types of contract and when you should consider using each one for your project we use builder to refer to the entity carrying out the construction services an owner to refer to the entity contracting the builder to carry out construction services [Music] so now let's dive into the four different types of construction contracts number one lump sum contracts lump sum contracts use a fixed price for all work done on the project these construction contracts are also called fixed price or stipulated sum contracts incentives are sometimes built into these contracts to reward the builder if the job is completed ahead of schedule these agreements can also include penalties sometimes called liquidated damages for a job that is completed late owners typically use these types of contracts to steer clear of change orders for any additional or otherwise undetermined work when signing a lump sum contract the builder takes on additional risk since the owner is not obligated to pay more than the original price if the project goes out of scope problems come up or any other changes occur during the project [Music] some lump sum contracts account for this by including separate allowances that cover unforeseen costs and changes [Music] if an owner decides to use a lump sum contract on a project builders can typically charge a higher fee to account for the additional risk they are taking on otherwise any unforeseen costs can either read into a builder's profit or result in a project that may not be completed as envisioned pros of lump sum contracts [Music] builders have a clear expectation of the scope owners avoid paying unexpected project costs cons of lump sum contracts it can result in lost profit if project goes over scope budget constraints may limit project outcomes so when to sign this type of construction contract lump sum contracts are ideal for projects with a defined timeline and scope of work if these are not clearly agreed upon it can be difficult for builders to estimate cost ahead of time and avoid any overscopes number two unit price contract unit price contracts typically emphasize the types of tasks being carried out in addition to the materials used on those tasks [Music] this categorized style of pricing makes it easier for owners to evaluate each cost and allows builders to more accurately charge for each category this type of construction contract is not typically used for major construction projects and is more often used for smaller jobs like repair or maintenance work [Music] with unit price contracts it's easier to adjust prices when the scope of work changes pros of unit price contracts it is easy to evaluate costs of different categories and also easy to adjust prices when scope changes cons of unit price contracts difficult to estimate costs for large projects final cost is not defined in the beginning so when to sign this type of construction contract unit price contracts are more commonly used for repetitive work and public works projects [Music] for example routine building maintenance could more easily be charged through a unit price contract since it specifies the values of different maintenance tasks required number three cost plus contract [Music] cost plus contracts normally require the owner to pay for all project expenses like the cost of materials labor and any other projects costs additionally these types of contracts will also include an agreed upon amount or percentage that covers the builder's overhead costs and profit that the owner also pays depending on the type of cost plus contract the owner may end up paying more than anticipated and therefore generally takes on more risk than the builder [Music] pros of cost plus contracts it reduces risk for builders project is more likely to be completed as planned cons of cost plus contracts project can go over scope if caps are not applied and it is difficult to manage and track [Music] so when to sign cost plus contract cost plus contracts are normally used when the scope of work materials labor and equipment are not clearly defined or difficult to estimate from the beginning projects using this type of contract are more likely to be completed as envisioned since builders are not completely limited by cost however this contract type is more complex to manage and requires close tracking number four time and materials contract time and materials contracts define an hourly or daily rate for builders in addition to paying this rate owners also agree to pay any related project costs which are noted in the contract as direct indirect markup and overhead costs pros of time and materials contracts builders are not completely limited by budget it is easy to use for small projects cons of time and materials contracts project can go over scope if caps are not applied difficult to estimate final cost so when to sign time and materials contract time and materials contracts are typically used when the scope of work is unclear and carry less risk it is mostly used for small projects where owners can better estimate the project's scope to anticipate the final cost price or project duration caps are also common for this contract to mitigate the owner's risk understanding the different types of construction contracts helps you decide what type is right for you and your project along with the contract there are many other moving parts to consider like the amount of labor you will need the construction technology you should consider and the major machinery you will need for the job also consider implementing value engineering into your next project to help you weigh out cost and material options to ensure you are getting the best value [Music] and that's all for today's video please don't forget to like share and subscribe us