Choosing the most suitable construction contract for your project can be a very confusing task as there are many different options and suites of contract on the market (e.g. JCT, NEC, Public Sector Partnering Contract, PPC2000, ICE, etc). Selecting the wrong form of contract could be very costly.
The primary job of the contract is to provide a warranty that the executed project will be delivered:
- To an agreed time table
- To an agreed price or cost and how the compensation will be distributed
- To an agreed standard and quality
- To meet all current legislation
The standard forms of construction contract are usually defined by the way risk is allocated and managed.
Lump Sum Contract
This type of contract involves a lump sum price for all construction related activities. Lump sum contracts can include incentives or benefits for early completion, or can also have penalties, often called liquidated damages, for a late completion. Lump Sum contracts are preferred when a clear scope and a defined schedule of work has been agreed upon.
Cost Reimbursable Contracts
This type of contract involves payment of the actual costs incurred, purchases or other expenses generated directly from the construction activity. Cost reimbursable contracts must contain specific details of the contractor overhead and profit margin (usually expressed as a percentage). Costs must be detailed and should be classified as direct or indirect costs. There are multiple arrangements for cost reimbursable contracts and the most common are:
- Cost plus a Fixed Percentage
- Target Price
- Target Price with a Guaranteed Maximum Price
Schedule of Rates or Term Contract
Schedule of Rates or Term Contracts are usually preferred if:
- Scope of the project is not clear
- The scope project has not been defined
- The nature of the work is on a ‘call off basis’ such as responsive repairs
The client and the contractor must establish a basis for payment which may include:
- An agreed hourly or daily rate, including additional expenses that could arise in the construction process
- All-in measured rates and prices
The various suites of standard forms of contract mostly all cater for the contracting options described above.
If you would like assistance on the choice of contract for your project please call us on 0114 243 0900 or complete an Enquiry Form