Common Types of Construction Contracts

The prospect of building your new timber frame home can feel daunting.   There are so many decisions to make.   Working with the right timber frame company and hiring the right contractor are two of the most important choices you will make.   Your timber frame company will guide you through the design process and will cut your timber frame, raise, and enclose it.  The contractor will be responsible for the permits, subcontractors, and all other building materials.

The most common contracts you’ll find in residential construction are lump sum contracts and cost plus contracts.   There are variations of both and each have advantages and disadvantages for both the owner and the contractor.    As you interview contractors, you should discuss the type of contract that they work with and what options you have.  Most contractors are pleased to have the opportunity to work with timber frames and the timber frame company should be willing to discuss the project with the contractors you are interviewing.

The lump sum contract is sometimes called a stipulated sum and is the most basic of contracts.  The contractor agrees to build the home to the specifications as defined by the plans for a fixed amount.   You will need a fully developed set of builder’s plans prior to moving forward with a lump sum contract.  The builder will bid the project based on the scope of work and the specifications agreed upon.

Advantages

  • The cost is agreed upon at the beginning of the contract.
  • The project should move forward quickly because material selections are made well in advance.

Disadvantages

  • If material selections are not carefully specified, the contractor has the option of using materials and methods that meet the minimum options specified.
  • Because there is a risk to the contractor, the contractor’s fee will include money to cover this risk.
  • Change orders can be costly and difficult.

The cost plus contracts are available in more than one format and offer flexibility. Typically, the contractor will work up an estimate to build the home, including allowances for fixtures, flooring, appliances, lighting and other items.  The two most commonly used cost plus agreements are cost plus a percentage and cost plus a fixed fee.

Cost plus a percentage has been one of the most common contracts for many years. With this contract, the contractor charges for all direct and indirect costs plus a fixed percentage.

Cost plus a fixed fee is becoming a more popular version of the cost plus contract. The contract is based on estimates provided by the contractor and a fee based on those estimates is calculated and agreed upon.   While the material and labor costs may change, the fee is set and isn’t impacted by the owner’s decision to upgrade materials, fixtures, or appliances.  While minor change orders may not impact the fee, significant changes may fall outside of the fixed fee agreement and a separate fee charged by the contractor.

Advantages

  • There is no reason for the contractor to use materials that meet only minimum specifications.
  • The contractor can work with a lower margin than with a lump sum contract.
  • With a fixed fee, the owner has more control over the total cost of the project based on his/her choices.
  • With a fixed fee, the contractor has more incentive to move the project forward to completion more quickly.
  • The owner can take advantage of the builder’s discount on materials.

Disadvantages

  • Cost plus a percentage can lead to overspending and a longer build time by the contractor in order to increase his fee.
  • There is no guarantee of the final cost.

While we’ve only addressed the most common types of construction contracts there are variations that may work to your advantage.  You can negotiate either a bonus or a penalty (or both) to bring the project in on or under time and budget.  No contract is set in stone and the details should be worked out well in advance of signing the agreement.

So move forward carefully, but when you build…build boldly.

If you’d like some sample contracts, just give me a call at 828-524-8662 or email me at

bonnie@goshenframes.com
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Thanks for joining us here, Bonnie Pickartz