construction contracts

A Guide to Construction Contract Types and Some Key Terms

The daunting process of starting a construction project is a massive undertaking, and there are many vital considerations to be aware of throughout the experience. Our experience has demonstrated, that one of the most essential parts of any construction endeavor is the construction contract. 

There are multiple construction contract types. Each of the construction contract types approaches a project differently. Understanding these different construction contract types is beneficial to being an informed and active participant in your construction project from beginning to end. 

This article contains our New York litigation firm’s general guides to construction contract types so you can read and review up you some of their key elements. Staying informed on construction contract types, as an owner, developer, or builder, can also help you protect your interests throughout the process and know when to seek help. 

Construction Contract Definition

Before describing the different construction contract types, it’s first essential to define what a construction contract is. 

A construction contract serves as an agreement outlining the specifics of the work to be done as part of a construction project. This agreement is made between two or more parties. In most cases, it is a contract between a client seeking work to be done and a contractor who will perform the work. The contents of a construction contract can include the kind of work that will be done, the construction schedule, the specifics of payment, insurance requirements and other conditions or terms related to the project and work to be done. 

If disputes or breaches of contract occur, it is necessary to find lawyers that specialize in contracts or construction contracts, in particular, to help resolve them.

Main Construction Contract Types

Understanding the different forms of construction contracts is key to understanding which type makes the most sense for your particular situation. It is also essential to know the benefits and risks of each type of contract. There are four main construction contract types, which include: 

  • Stipulated Price Contracts
  • Unit Price Contract
  • Cost-Plus Contract
  • Time and Materials Contract

Stipulated Price Contracts

One of the most common construction contract types is a stipulated price contract, which may also be a fixed price or lump sum contract. This type of contract determines one set price for all of the work on a particular project. The fixed price outlined in this contract includes all of the project costs, from the price of materials to the required labor cost.

Construction projects often come with unforeseen complications along the way, such as needing to add to the initial scope of the project or facing unexpected building challenges. To address the potential for changes throughout the length of the project, a contractor may choose to charge a greater fee from the start, or an allowance may be built into the contract dedicated toward unforeseen costs. A stipulated price contract can mean that a contractor assumes a certain degree of risk. If unexpected fees arise that aren’t covered by the initial agreement, the contractor may seek a resolution through negotiation or New York litigation.

Unit Price Contract

Whereas a stipulated price contract determines a lump sum for a construction project as a whole, a unit price contract outlines the cost of a project in terms of units of work. Each unit refers to one aspect of the work needed to be done. A project can be separated into different tasks, and each type of task can be priced out as a unit. When it comes to construction contract types, a unit price contract allows for flexibility in that different units can be easily added or removed as the project progresses. For example, if one task needs to be repeated several times, the number of its units can be increased, and if another task is no longer needed, it can be easily removed from the contract. 

Cost-Plus Contract 

A cost-plus contract separates the cost of materials from the contractor’s profit. This type of contract stipulates that the client will pay for the materials and labor needed to complete the project. It then outlines another independent payment that the client will make that serves as the contractor’s profit, considering their overhead well. 

In a stipulated price contract, the contractor may lose money if unforeseen and costly complications arise throughout the project’s lifetime. In a cost-plus contract, the client may be at risk if the project expenses end up being more than initially expected. The ramifications of unexpected costs can be addressed by having a qualified and experienced New York litigation firm.

Time and Materials Contract 

The last most common construction contract type is the time and materials contract. This contract describes the type of work that will be done and specifies that the client will pay for the materials needed to complete the project. This type of contract also determines an hourly or daily rate that the client will pay that addresses the contractor’s labor cost and any workers involved with the project. 

In some instances, a “not-to-exceed” clause will be added to a time and materials contract that caps the total project cost at a specific named number, ensuring that the client will not pay more than this designated maximum overall cost. In the event that a not-to-exceed clause is breached and the client is billed more than the maximum overall cost, a New York litigation lawyer can be instrumental in resolving a contract breach.

Prepare for Negotiation

No matter which of the four main construction contract types you decide to use for your project, it is unlikely that the first draft of the contract will be the final, finished version used for the project. Whether you are the owner looking to have a construction project done or the contractor hoping to be hired to complete the work, you should be prepared for negotiation by having reviewed any requested changes from the other side, deciding which changes you want to propose, and keeping in mind your main goals and interests such as cost and schedule. 

Important Construction Contract Clauses

Any of the four construction contract types described above can benefit from adding certain clauses designed to address potential issues or areas that can be overlooked in basic contracts and that might pose issues later on in the project. A few key construction contract clauses to consider adding to your own contract include:

  • Dispute Resolution Clause
  • Variation Clause
  • Escalation Clause

Dispute Resolution Clause

This type of clause sets out agreed-upon methods of resolving any potential disputes that may arise throughout the project. Even if you do not expect to have any disputes, it is better to have the possible protection this clause offers in case any disagreement does arise than not to have a method of resolution outlined in advance. Most AIA contracts provide for disputes to be resolved in binding arbitration. Like all terms of a contract, this provision is negotiable; and depending on the circumstances, it may be advisable to have any dispute to be litigated in Court. 

In New York litigation, the Prompt Payment Act applies to many commercial projects and outlines resolution steps if payment obligations are not met and may play a role in how disputes are handled.

Variation Clause 

Variations in construction projects refer to changes in the initial details of the project, such as an increase in the overall scope of work or a change in the originally agreed upon design. These are also referred to as Change Orders. It is imperative to make sure the terms of the change orders are clear; and not duplicative of what was already required under the contract.  A variation clause specifies a protocol to be followed should variations arise. If a variation clause is not included, the client or contractor may need to hire a law firm to help resolve the resulting issues.

Escalation Clause

Price escalation clauses account for potential increases in costs between the time the contract is drawn up and construction begins or during the lifetime of the actual construction itself. A construction project can take a long time to complete, leaving room for the market to shift and costs to change drastically. 

In the event that an individual turns to New York litigation to seek legal action, it can be challenging to make any headway if there was no escalation clause in the construction contract, to begin with. Adding an escalation clause into the original contract makes potential future claims easier to deal with.

Choose Woods Lonergan Law for Construction Contract Help

The different construction contract types represent a key area of New York litigation. Construction projects can lead to disagreements or disputes if key parts of the contract are breached or if changes take place throughout the construction process that the original contract cannot address. 

Woods Lonergan is a leading legal firm in New York City that will prioritize your individual needs and protect your interests so you can confidently pursue your construction project and meet any disputes that arise head-on.

When you need assistance in navigating disputes stemming from different construction contract types and other New York litigation matters, Woods Lonergan is available to help. Contact us today to set up a consultation.