The 7 Types of Construction Contracts

Construction contracts are complex legal documents designed to protect construction professionals and the individuals who contract work. Since construction projects vary significantly in terms of time requirements, scope, budget, and delivery, many types of construction contracts exist to meet the needs of each job. 

Learning about the different types of construction contracts and adopting contract management best practices can help you ensure you use the right contract for each project. 

What is a Construction Contract & What Types of Contracts Are Available?

A construction contract is a legal document or set of documents that outlines the terms of a construction project. These documents act as an agreement between a contractor taking on work and the owner requesting work. They cover all details about the project, including cost, payment terms, schedule, scope, specific tasks, and all other project information. 

There are 10 types of construction contracts, including: 

• Cost-Plus contracts
• Design-build contracts
• Guaranteed maximum price contracts
• Incentive construction contracts
• Integrated project delivery contracts
• Lump sum contracts
• Time & materials contracts
• Unit price contracts
• Joint venture agreements
• Field orders

Along with learning how to build a better construction management program and incorporating digital construction contract agreements into your workflow, understanding when and how to use these common construction agreements can help you avoid problems and ensure success. 

1. Lump Sum Contracts

Lump sum contracts develop a fixed price for all materials and labor to complete an entire project. This type of contract makes it easy for owners to compare bids of lump sum costs. 

However, it places a risk on contractors because it depends on accuracy.  Lump sum contracts are best used  for predictable projects with a well-defined scope of work. They’re also useful for projects where owners must minimize supervision requirements. 

2. Cost-Plus Contracts

Cost-plus contracts reimburse you for costs estimated to complete a project plus an agreed-upon amount for profit. Costs include direct costs (labor, materials, etc.) and overhead or indirect costs (insurance, mileage, etc.). These contracts are beneficial for construction companies because they ensure you’ll make a profit.

It’s important to note that additional resources are often required to keep track of present expenses. Many cost-plus contracts also include clauses with amounts you cannot exceed. Cost-plus contracts are ideal for projects with uncertain costs because they can minimize risks for contractors. 

3. Time and Material Contracts

A time and materials (T&M) contract allows the contractor to establish prices for labor rates and specific materials for use along with a markup rate. This allows for unexpected costs to be built into the original price. While they generally include a “not-to-exceed” clause, T&M contracts reduce risks for contractors related to fluctuating material and labor costs. 

However, the lack of upfront transparency in these contracts about the final costs can make them less attractive to owners. T&M contracts are frequently favored in situations when the scope or duration of a job is difficult to determine at the beginning of the project. 

4. Unit Price Contracts

A unit price contract sets a fixed price per unit (with units being defined as a distinct, repeatable aspect of a project). Units can be materials, labor, overhead, supplies, or profit. In most cases, the contract will include an estimate of the number of units required to complete a project. These contracts work well with projects that can easily be divided into units. 

Unit price contracts are not always a good fit for complex projects. They are typically used for agreements with subcontractors for specific parts of a job since anticipated quantities and costs of items in a specific trade are easier to quantify. 

5. Design-Build Contracts

Traditional construction contracts allow construction professionals to bid on a contract after an architect has finished the design phase. A design-build contract is used when the owner awards the entire project to a single company. 

The contractor is then responsible for hiring all architects and engineers to complete design work and overseeing the construction process. A design-build contract can help speed up the process and decrease disputes between the designer and builder. 

However, it can lead to higher costs for the owner because there is no competitive bidding phase. Design-build contracts are used more frequently in larger complete projects to create a more predictable cost framework and schedule. 

6. Integrated Project Delivery (IPD) Contracts

Similar to design-build contracts, integrated project delivery (IPD) contracts prioritize collaboration by including the designer and builder in the same contract. The main difference is that IPD contracts don’t require a single contractor to oversee the entire project. Instead, the designer (architect) and construction team enter a multi-party contract with the property owner. 

This type of contract spreads the risk and reward between the designer, builder, and owner and prioritizes collaboration.  This can occasionally lead to disputes and make it difficult for contractors to secure financing due to the complex nature of shared risk between parties. IPD contracts are ideal for projects that demand increased transparency and a collaborative approach.

7. Joint Venture Agreements

Joint venture agreements are contracts that outline the nature of a temporary relationship between two or more companies to complete a single project.  Several different types of joint venture agreements in construction are used to assign specific work requirements and distribute risk. 

Joint venture agreements offer the advantages of assigning more workers to a job to finish workfaster. However, this can sometimes increase the potential for internal disputes among workers. Joint venture agreements are frequently used for large projects that must be finished under tight deadlines. 

Structure Your Construction Contract the Right Way with Docubee

There is no one-size-fits-all contract that covers all the nuances of your unique construction projects. Maintaining a library of the most common types of construction contracts ensures you have a contract available for every situation so that work can begin sooner. Luckily, creating personalized construction contracts doesn’t have to be a difficult manual task. Document generation for projects using Docubee allows you to use customizable templates and AI generation for fast and painless document generation. 

Schedule a demo to learn more about how we can help you streamline your construction contract management system.