Types of Construction Contracts

There are always at least two questions that facilities managers ask contractors before work is completed:

Number one, they want to know how much the work is going to cost them.

Number two, how long is the work going to take to complete?

These are two very important questions. However, there are a couple of other bits that you should not forget.

During most construction projects, a contract is written up and put into place.

But which construction contracts are best for my company?

Lets discuss this a little further:

#1 Make Sure That You Understand The Construction Contracts On Offer.

You wouldn’t commit to buying a new car before checking the finer details over, right?

The same can be said for construction projects. Let us explain:

A construction contract is an agreement between two parties, usually the contractor and the facilities manager (in some cases this could be a site manager/building manager).

This “agreement” provides a number of finer details based on your requirements as the customer.

For example:

If you contacted a contractor to complete a cladding refurbishment, they would present a construction contract that detailed the exact works required.

Throughout the contract, important details such as start dates, deadlines, costs, and materials will be listed.

There will even be important details such as health and safety arrangements.
When you are comfortable with the potential agreements that could be set in place, make sure that you read point #2 when we discuss the construction contracts that are available.

Construction Contracts Available

#2 Try To Understand What The Best Contract Is For Your Business.

There are many forms of construction contract. They are:

  • Lump Sum Contracts
  • Lump Sum + Scheduled Contracts
  • Cost + Fixed Fee Contracts
  • Cost + Percentage Contracts
  • Turn Key Contracts
  • Negotiated Contracts
  • Package Contracts
  • Continuing Contracts
  • Running Contracts

So how exactly do you determine which contract is best for your requirements?

In truth – it’s hard.

However, ask yourself and your business a few simple questions to get you in the right frame of mind:

“What is the budget – Is there room to manoeuvre?”
“Are we liable for the costs of materials?”
“Does the project need to be completed by a set deadline?”

These are just a small selection of useful questions that have been tried and tested previously.

Make sure that you ask your contractor at least 5-10 questions before making any commitment. The answers could help you negotiate a better rate or contractual agreement.

#3 Is A Lump Sum Contract The Right Option For Me?

Ask yourself these questions to help determine whether a lump sum construction contract is the best route to follow:

Is the scope of work clear and precise?

Have all of the materials and costs been presented correctly?

Is there any chance that the work could overrun?

From our experience, a lump sum contract is best suited to refurbishment or repair projects that are very clear and easily understood.

If all of the necessary costs are detailed correctly, and the chances of any significant changes are small – then a lump sum contract could be your best option.

You should avoid a lump sum agreement with your preferred contractor if:

  • There is a chance that changes to the scope of works are likely
  • Costs and materials have been partially listed/agreed
  • The difficulty of repair or refurbishment is high

Types of Available Construction Contracts

#4 What’s the Difference Between Lump Sum and Scheduled?

A lump sum contract is exactly as it sounds. However, there is a slight difference between the two in discussion. Such as:

A lump sum + scheduled contract is otherwise known as a “fixed fee”.

Benefits of a fixed fee contractual agreement tend to include:

  • Lower risk for the business
  • Higher risk for the contractor
  • The chosen contractor has a higher incentive to finish works quicker and on time
  • The choice of contractors available is a much easier process

#5 Consider a Turnkey Contract For Large Scale Projects

Is it worth discussing the possibility of a turnkey contract with your preferred contractor?

Absolutely. But what is a turnkey contract?

The definition of a turnkey contract is as follows:

An agreement under which a contractor completes a project, then hands it over in fully working operational form to the client, which needs to do nothing but “turn a key”.

Many of the projects that we complete include cut edge corrosion treatments and a lot of physical work to external building sheets. This makes it difficult to submit a turnkey project.

However, for large scale internal works such as commercial gas installations could certainly benefit from a turnkey project.

If you are considering turnkey construction contracts ask yourself these questions first:

  • Is the project highly specified?
  • Are there a lot of technical aspects involved?
  • Will the project require a significant amount of your budget?
  • How big is the project?
  • Are you under pressure to have everything working by a set date?

The biggest (and best) advantage of a turnkey contract is that from a customer perspective – your contractor will present a fully operational piece on completion.

There is no need to concern yourself with downtime – you simply “turn a key” and begin.

Construction Contracts Worker On Site

#6 More Than 5 Contractors? Use a Negotiable Agreement.

During large, long-term projects there are a number of non-negotiable procedures to endure. These include:

  • Planning
  • Implementation
  • Framework
  • Serial Procedures
  • Open & Selective Procedures
  • Negotiated

Now in most cases, large projects will use more than one preferred contractor unless you are able to source a local company that can simply “do it all”.

But let’s be realistic – that isn’t going to happen.

It is best to use a negotiable contract when the options available to you are high. For example:

If you need an electrical contractor to re-wire a commercial office block, you will have the option to choose from anywhere between 10-20 local contractors, making it extremely competitive.

Each company will want the works, especially on the commercial field.

We won’t use the word “desperation” because it seems a little strong but local contractors will want to gain your project for their long-term gain.

Advantages of using a negotiable construction contracts include:

  • Increased flexibility on choice of contractor
  • Opportunity to make a considerable amount of savings
  • Contractors costs are more transparent and easier to understand
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