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Budget constraints may limit project outcomes.Can result in lost profit if project goes over scope.Builders have a clear expectation of the scope.

Owners avoid paying unexpected project costs.Otherwise, any unforeseen costs can either eat into a builder’s profit or result in a project that may not be completed as envisioned. If an owner decides to use a lump sum contract on a project, builders can typically charge a higher fee to account for the additional risk they are taking on. Some lump sum contracts account for this by including separate allowances that cover unforeseen costs and changes. When signing a lump sum contract, the builder takes on additional risk since the owner is not obligated to pay more than the original price if the project goes out of scope, problems come up or any other changes occur during the project. Owners typically use these types of contracts to steer clear of change orders for any additional or otherwise undetermined work. These agreements can also include penalties, sometimes called “liquidated damages,” for a job that is completed late. Incentives are sometimes built into these contracts to reward the builder if the job is completed ahead of schedule. These construction contracts are also called “fixed price” or “stipulated sum” contracts. Lump Sum ContractĪ lump sum contract sets one determined price for all work done for the project. Learn below about the four most common types of construction contracts.

We use “builder” to refer to the entity carrying out the construction services and “owner” to refer to the entity contracting the builder to carry out construction services. To help you get familiar with your options, we explained the differences between different types of contract and when you should consider using each one for your projects. There are many types of building contracts, and they are usually tailored to the needs of the project. A contract protects both the builder and the owner by ensuring expectations are clear from the beginning and avoiding potential headaches caused by overages and other unexpected issues. Understanding the different types of construction contracts is essential, as they determine what you pay, what you’re liable for, and many other aspects of the job.