Types of Engineering Contracts : The 5 Main Types of Construction Contracts

The engineering projects involve many professionals like engineers, owners, architects, designers, suppliers, contractors, or subcontractors. Since every party has its own choices or interests, it is essential to create a legal document. A document that guarantees security for each party involved in the project. That is an engineering contract! Let’s discover these types of Engineering Contracts. To assist you in getting familiar with your project choices, we have already explained the different types of Construction Contracts commonly used. Plus, this post will allow you to know exactly when to consider a specific type of contract for your project.

1. Fixed Price/Lump Sum Contracts

The lump-sum is a type of contract in which the contractor offers a single fixed amount for all the required tasks in the project scope. The contractor estimates the price of the project with the help of construction specifications or development charts. Then profit and overhead are included in the overall project cost calculation. The main characteristics of lump-sum contracts are:

• All the risks involved are for the contractors.
• There is no risk for owners.
• This contract incorporates incentives for early completion.
• This contract includes some penalties for late completion.

Use: This contract of construction is suitable for projects with a well-defined and detailed schedule and scope. Also, complete the project design before using this type of contract, as there is less flexibility for alterations during the development stage.

2. Unit Price Contracts

Generally, federal agencies or builders use unit price on this type of Construction Contract. This contract depends on units instead of a single price. Like the cost of a cubic meter of concrete increase or multiply by the required quantity. The main characteristics of this type of contract are:

• There is a specific cost for every individual task done by the contractors.
• Owners can estimate the project price, but they provide the exact price after project completion.
• The contractor will get paid by defined units verified by the owner.
• The owner can define the unit price through the bidding process. So, the owner can avoid unreasonable costs.
• Unit prices can change because of the changes in scope.

Use: This type of Engineering contract is suitable if the work quantity is not known for its flexibility between the original and expected work.

3. Cost-Plus Contracts

In cost-plus types of Construction Contracts, the contractors are paid by considering labor costs, actual purchases, and different expenses produced by the project. Essentially, this contract incorporates all direct and indirect prices, also a certain fee. These contracts should detail the pre-negotiated cost that includes the profit and overhead of the contractor. Likewise, all expenses should be defined and declared as direct or indirect prices. This type of contract incorporates the following characteristics:

• All risks are for the owner.
• The owner is equally involved in the construction project with the contractor.
• If the project costs increase, the contractor has no risk.
• There is no chance of labor cost reduction by working faster.
• More supervision is needed because there is almost no risk for contractors. Plus, it is hard to track all the expenses.

A cost-plus Engineering contract has different versions like:

Cost-Plus Fixed Fee:

Payment covers the relative costs of the project and a fixed amount for the overhead and profit of the constructor.

Cost-Plus Fixed Percentage:

Payment includes both the project costs and the overhead and profit of the constructor. The amount paid for the overhead and profit of the constructor depends on a fixed percentage of the project cost.

Cost-Plus with GMP (Guaranteed Maximum Price):

Payment covers all the project costs and a certain fee paid up to the maximum amount.

Use: These Engineering Contracts suit projects in which the scope is not fully defined if there is a chance of some uncertainty.

4. Time and Materials Contracts

In this contract, the contractor and owner should agree on a daily or hourly cost that incorporates additional costs determined during construction phases. The characteristics of this type of contract are:

• The prices should be added and defined as overhead, profit, direct, or indirect.
• The owners can create a specific project duration or a price cap for contractors to limit their own risk.

Use: This type of Engineering contract is ideal to use if there is no defined scope. These contracts are suitable for small scope projects.  You can sign this contract if you have a precise estimate of what time it will require to conclude the project scope.

Wrap Up about Engineering Contracts

Analyzing different types of engineering contracts assists you in deciding the right kind for your project. There are many other factors to consider rather than just the contract type. Like the required labor cost, the number of risks involved, the construction technology you need to use, and the machinery you’ll require for your project.

You must be very clear about these parameters to choose the right type of engineering contract for your project.

Read also: Technology and Architecture

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