This form is a Construction Contract. The form contains the following subjects: scope of work, work site, and insurance. The contractor's warranty is limited to defects in workmanship within the scope of the work performed by the contractor.
What is a Construction contract agreement?
If you’re planning to build, renovate or reconstruct your house, you will need to enter into a contract for home construction with the building contractor, defining your mutual rights and responsibilities. This agreement contains project specifics, the contractor’s license and insurance details, the requested scope of work, etc. It may also determine the potential lien on the property should the work not be paid in full.
Types of construction contracts
Depending on the payment arrangements determined by parties, there are four basic types of home builders’ contracts:
1. Fixed price (or lump-sum) agreements set the price for the completed job right from the start. Although fixed, the document may also include provisions defining penalties (for example, if the constructor fails to finish the work on schedule).
2. Cost plus construction agreements set the price for the finished work based on building materials and labor with additionally mentioned “plus” (a percentage of the total costs or a fixed fee).
3. Time and material agreements set the price for the work without a “plus,” but the client pays the contractor a daily or hourly rate while they are under contract.
4. Unit-price agreements are standard in bidding, particularly for federal building projects. Both owner and contractor define the price that the contractor charges for a standard unit without any specific extra fees for other units.
The first two types of contract for home construction mentioned are the most popular ones. Let’s take a closer look at them.
Fixed price vs. cost-plus contract benefits
The fixed price agreement benefits owners more than builders, as it determines at the moment the parties seal the deal the exact price the contractor will get after they complete all the work. Builders risk not getting the estimated profits they initially anticipated, as expenses may increase significantly but remain the constructor’s responsibility.
The cost-plus construction deal contains the evaluation of the final project cost; however, it doesn’t determine the final contract price until the contractor completes all the work. Unlike the fixed-price agreement, it separates expenses and sets the profit rate (as a percentage of the final project cost or as a flat amount), so contractors prefer this type of agreement; it is riskier for homeowners.
Information you should provide in the construction contract agreement
The presented Construction Contract for Home is a universal multi-state construction contract template. This sample describes typical terms for a home building contract. Download a printable document version from our website or amend and fill it out online. Make sure to provide the following information:
• Name and contact details of the contractor and their license number;
• Name and contact details of the homeowner;
• Property legal description from county clerk’s records;
• Project description with blueprints and building specifications;
• Scope, description of work, and its estimated final dates;
• Costs of work and responsibilities of parties for any breach of contract.
A cost plus contract, also known as a cost reimbursement contract, is a type of agreement between two parties where the buyer agrees to pay the seller for the costs incurred during the project, along with an additional fee or profit margin. This contract is commonly used in construction, consulting, and government projects where it is difficult to determine the exact scope and time required to complete the work. In a cost plus contract, the buyer reimburses the seller for all the direct and indirect costs incurred, such as labor, materials, overhead expenses, and any other related expenses. Additionally, the seller is entitled to a predetermined fee or profit margin, which is usually a percentage of the total cost. This profit margin is added to cover the seller's risk and provide an incentive for efficient project management. To understand this contract better, let's consider an example. ABC Construction is hired by XYZ Corporation to build a commercial complex. The scope of the project is extensive, involving various uncertainties and potential changes. Given the complexity and unknown variables, both parties agree to utilize a cost plus contract. ABC Construction starts the project and incurs costs such as hiring labor, purchasing materials, renting equipment, and covering administrative expenses like permits and insurance. All these costs are detailed, documented, and submitted regularly to XYZ Corporation for reimbursement. In addition to the reimbursable expenses, ABC Construction includes a profit margin of 10% in the cost plus contract. This percentage is determined during the negotiation phase and is based on various factors such as market conditions, project complexity, and the reputation of the construction company. As the project progresses, unforeseen challenges arise, such as changes in building codes or unexpected site conditions. With a cost plus contract, ABC Construction can address these issues without having to renegotiate the terms, as the buyer is committed to reimbursing the actual costs incurred. Different types of cost plus contracts exist depending on the specific requirements and negotiation between the parties involved. Some common types include: 1. Cost Plus Fixed Fee (CUFF) Contract: In this type, the seller receives a fixed fee, agreed upon in advance, in addition to the reimbursement of costs. For example, if the fixed fee is $10,000 and the total incurred costs amount to $100,000, the buyer would pay $110,000 in total. 2. Cost Plus Incentive Fee (CPI) Contract: With a CPI contract, the seller is incentivized to achieve certain predetermined targets, such as completing the project ahead of schedule or under budget. If these targets are met, the seller receives additional incentives or bonuses in addition to the cost reimbursement and base fee. 3. Cost Plus Percentage of Cost (CPC) Contract: In this type, the seller's fee is calculated based on a percentage of the total cost of the project. For example, if the agreed percentage is 5% and the total incurred costs amount to $200,000, the buyer would pay $210,000 in total. By utilizing a cost plus contract, both buyers and sellers can effectively manage projects with unpredictable variables and maintain a transparent and flexible approach to cost reimbursement. However, it is crucial for both parties to establish clear guidelines, documentation requirements, and a robust tracking system to ensure accurate cost reporting and reimbursement in accordance with the contract terms.
