Types of Building Contract Agreements

Building Contracts

Whether you are building a new home or renovating and remodeling an existing home, you will need to agree a contract with your building contractors.

In some cases this may be an informal oral agreement, sealed with a handshake. In most cases it will be a professional document outlining the work to be completed, the bid price and the terms of trade.

Regardless of the type of contract, it is extremely important to verify the terms of the agreement. These are the commercial terms upon which the contract is executed. In most cases this will be either cost-plus or fixed contract.

Cost Plus Contract

A cost-plus contract is one where the contractor agrees to supply labor and materials for $x plus any agreed extras.

This type of agreement is somewhat open to any circumstance encountered by the builder.

For example, an excavator arrives to prepare the ground for your new basement and finds an unexpected water course. This will require regulatory approval to build over, extra drainage and foundation work. This may add significantly to the project cost. The final cost will be the original cost PLUS the extra work involved in containing and building around the water course. This type of circumstance is generally acceptable to the owner of the property, depending upon whose responsibility is was to check for such site features prior to bidding.

Other scenarios are not quite so clear cut. Imagine that the Contractor allowed 20 hours for demolition and clearing away of existing structures to be rebuilt as part of a home remodeling project. If the contractor finds that due to particularly hard to remove and dismantle structure, the time allocated was grossly underestimated, and instead took 34 hours. This is not your fault. Some contractors may attempt to make a claim for this additional time, claiming that the wall interior was not accessible at the time of bidding. Sorry – but it is their responsibility to understand different types of construction and should have a very clear idea of what is inside each wall cavity.

Contractors prefer Cost Plus type of bidding because it relieves them of sticking to a set price.

So whilst, in the first instance, the cost is fairly added to your final bill, the second scenario must be absorbed by the Contractor. This is where the home owner needs to be careful in their pre-contract discussions and due diligence when screening a contractor.

Do not let building contractors use this bid model as a haven for their poor estimating. You expect to have normal contingencies included in the base bid price. Discuss the types of additional costs with your contractor at the time you are reviewing the bid.

Because of the discretionary and subjective nature of a Cost Plus building contract – this is the best for the contractor and the riskiest type of contract for you. You may find you end up with a bill twice the cost of what you agreed to initially.

Remember that surprises are not uncommon in construction. Reduce surprises to a minimum with careful contracting terms.

Fixed Cost Contracts

The more favorable type of building contract for the owner is a Fixed Cost one. A Fixed Cost Contract is one where the the contractor will supply all labor and materials for $x. That’s it!

If the building contractor miscalculates, he has to absorb the cost. This puts cost management squarely on the shoulders of the contractor. It also adds responsibility in the pre-contract assessment carried out by the contractor to ensure that all potential contingencies are covered off as agreed extras.

A Fixed Cost agreement protects you from contractors looking to take advantage of homeowners. They will not be able to bid low to get the job, then charge thousands of dollars more based on so called ‘PLUS’ items.

A building contractor will normally add 15% to the expected cost of building to account for unforeseen contingencies. This contingency amount can either be agreed to be included in the total cost of the contract or agreed as a maximum contingency fund. This means, that if no surprises eventuate, then this sum is not payable by the owner.

For this reason, a Cost-Plus bid will typically be lower than a Fixed Cost bid.

Owner Responsibility With Bids

There are two areas where you, as home owner, have a responsibility to the building contractor in the bid process.

As the home owner, you should be aware of the different approaches to these types of bids, and specify on the bid request which type of bid you want. This is the only way you can effectively compare bids between similar quality contractors.

You also need to be fair to the contractor. Do not withhold information that you know may impact the cost, or constantly change your mind during the building construction expecting the price to remain unchanged.

Changes in design should be written and signed by both parties. Changes result in increased labor and materials needed to complete the job. This is why it is so important to get your ideas firmly agreed in the design phase. You can then get bids on a final design and a fixed price for the work. This clarity will save you time, frustration, and money in the long run.

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Types of Building Contracts