Building Contracts - What are the different types and what do they mean?

Building a new home, office, or any structure involves many decisions, and one of the most critical is choosing the right building contract. The contract sets the foundation for how the project will be managed, how risks are shared, and how costs are controlled. Selecting the wrong contract can lead to delays, disputes, or unexpected expenses. This post explores the most common types of building contracts, explaining their advantages and disadvantages to help you make an informed choice.

Construction site with partially built house and scaffolding

Lump Sum Contract

A lump sum contract, also known as a fixed-price contract, is one of the simplest and most common types. The contractor agrees to complete the project for a set price.

Pros

• Cost certainty: The total price is agreed upfront, which helps with budgeting.

• Clear scope: The contract usually includes detailed plans and specifications, reducing ambiguity.

• Simple management: Since the price is fixed, the client has less need to monitor costs closely.

  
  

Cons

• Less flexibility: Changes to the project scope can be expensive and require formal change orders.

• Risk on contractor: The contractor bears the risk of cost overruns, which may lead to cutting corners.

• Potential for disputes: If the scope is not clearly defined, disagreements about what is included can arise.

  
  

Example

If you want to build a custom home with a clear design and fixed budget, a lump sum contract can provide peace of mind. However, if you plan to make changes during construction, this contract might become costly.

Cost Plus Contract

In a cost plus contract, the client agrees to pay the actual construction costs plus a fee or percentage for the contractor’s profit.

Pros

• Flexibility: Changes can be made easily without renegotiating the entire contract.

• Transparency: The client can see the actual costs and verify expenses.

• Good for complex projects: When the scope is uncertain, this contract allows work to proceed without delay.

  
  

Cons

• Cost uncertainty: The final price is unknown, which can lead to budget overruns.

• Requires oversight: The client must monitor costs closely to avoid unnecessary expenses.

• Potential for inefficiency: Contractors may have less incentive to control costs.

  
  

Example

A renovation project with unknown structural issues might benefit from a cost plus contract, as it allows flexibility to address surprises without stopping work.

Design and Build Contract

This contract combines design and construction under one entity. The contractor handles both architectural design and building.

Pros

• Single point of responsibility: Simplifies communication and reduces conflicts between designer and builder.

• Faster completion: Overlapping design and construction phases can speed up the project.

• Cost control: Early involvement of the builder can help keep costs within budget.

  
  

Cons

• Less client control: The client has limited input during design and may have fewer options.

• Potential quality trade-offs: The contractor might prioritize cost savings over design quality.

• Risk of limited competition: Fewer bidders may be willing to take on both design and build roles.

  
  

Example

Commercial projects with tight deadlines often use design and build contracts to streamline delivery. For homeowners wanting full design control, this contract may feel restrictive.

Construction Management Contract

Under this contract, a construction manager oversees the project and hires subcontractors on behalf of the client.

Pros

• Client control: The client can select subcontractors and have more say in the process.

• Flexibility: Changes can be made during construction with less disruption.

• Transparency: The client sees detailed costs and progress reports.

  
  

Cons

• Higher management responsibility: The client or their representative must be more involved.

• Potentially higher costs: Fees for the construction manager add to the budget.

• Risk of coordination issues: Managing multiple subcontractors requires careful oversight.

  
  

Example

Large public projects or complex developments often use construction management contracts to maintain control and flexibility.

Unit Price Contract

This contract sets prices for specific units of work, such as per square foot or per cubic yard of concrete.

Pros

• Good for variable quantities: Useful when the exact amount of work is unknown.

• Fair pricing: The client pays only for the actual quantities used.

• Encourages efficiency: Contractors are motivated to work efficiently to control quantities.

  
  

Cons

• Quantity disputes: Measuring and agreeing on quantities can cause disagreements.

• Cost uncertainty: Total cost depends on the final quantities, which may vary.

• Complex administration: Requires detailed tracking and measurement.

  
  

Example

Road construction projects often use unit price contracts because the exact volume of materials can change during work.

How to Choose the Right Contract for you

Choosing the right building contract depends on several factors:

• Project scope clarity: If your plans are detailed and unlikely to change, lump sum contracts work well.

• Budget flexibility: If you have a strict budget, fixed-price contracts provide control.

• Project complexity: Complex or uncertain projects benefit from cost plus or construction management contracts.

• Client involvement: Decide how much control and oversight you want during construction.

• Timeline: Design and build contracts can speed up delivery when time is critical.

  
  

If you need help choosing the right contract for your project, we're happy to discuss your options with you, to see what best fits your needs. Drop us a message.