Which Contract is best for you?

As you consider building a property either from the ground up or remodeling and modernizing an existing building, you need team of experts to help you get the job done right. MGB Construction does an amazing job at making your vision become a reality but it isn’t just the building team who brings you the complete package. Construction companies can offer a range of packages as they work in conjunction with companies from other trades. This can be a benefit to the client simply by minimizing confusion with timing and dates, as anyone who has had any project will know that if one party is late, it holds up the whole show. You may discover that choosing a combined contract may or may not cost you more in the long run, as administration takes its cut. It depends on the working relationship between the builder their trades and suppliers.

In this article, we will look over some of the different construction contracts that exist, particularly in Toronto. We will examine what is involved in a basic contract and what a general cost of a contract for building a home will be. We will also list the positive implications as well as the negative ones, when looking at different contracts that construction companies offer clients.

A construction contract is a binding legal document, protecting both the construction company and the client from any misunderstandings and diversifications that may occur. A solid contract consists of a scope of work, all site conditions, drawings, a schedule and an outline of costs to name a few. For a detailed summary of what a construction contract should contain, have a look.

There are four types of common construction contracts available, each tailored to suit the different needs that a building project may encounter. They are as follows:

•    A lump sum or fixed price contract

As the name suggests, this type of contract covers all costs that a construction related activities. The price is fixed and can include incentives if the project is finished early or penalize a project that is finished late. This form of contract is obviously riskier for the builder who needs to account for any unforeseeable circumstances and changes and there will be a percentage within the overall cost to account for this. A lump sum contract is best used when both contractor and client agree clearly on a schedule and vision for the project. Perhaps the most popular of choices when a client knows what they are after and do not know all that much about the building procedure as to protect their assets. You may find that a contractor is inclined to use cheaper and lower quality materials in an attempt to cut costs to raise their profits on the job, even potentially cutting corners to reduce man hours when working on a fixed price contract. This is a very difficult contract to fulfil when completing a renovation as unforeseen items almost always come up.

•    A cost-plus contract

Here in this form of contract the client pays for the actual costs, purchases and other expenses made directly from the construction. There needs to be clear outlines as to what is classified as direct or indirect costs and contain information about covering the contractor’s overhead and profit. There are lots of variations to a cost-plus contract such as:

  • Cost plus fixed fee
    Cost plus fixed percentage
    Cost plus guaranteed maximum price

These types of contracts are best used when the options have not been clearly defined and there is some room for flexibility within the building process. It is up to the client to create some boundaries and guidelines. They however are harder to keep a track of with little risk to the contractor. This contractor should come with a detailed itemized budget, that is approved by both the client and builder. 

•    A time and materials contract

This type of contract is your best bet when the project scope is unclear. The contractor and client will agree on an hourly or daily rate and include additional expenses that may arise throughout the building process. Costs are labeled as direct, indirect, markup and overhead. The client is free to cap the budget and duration in which the builder must adhere to, in order for the client to be in more control. However, since the builder is being paid for his time, there is a chance that the project will move at a slower pace. Ensure you have a great relationship with your builder and that you feel the company is reliable and trustworthy beforehand. These are best used in smaller projects, or when you have a fairly good idea at how long a building project is going to take.

•    Unit pricing contracts

This type of contract is often used by builders and in federal agencies. By providing unit prices, clients have a firm control over what they are being charged and can ensure markups are not overinflated. As each unit is completed, other units can be adjusted according to how the entire construction project is panning out. It is a great way for both the client and the builder to work together fluidly, meeting problems as they arise and coming up with solutions. However, in this type of contract the end cost can be grossly under or overestimated, so completion of the project may come to a standstill if the budget runs out unexpectedly. Planning and budgeting are crucial.

Drawing up a sound contract is key to a successful property build. You need to be sure that you have a great relationship with your contractor and trust the company that you agree with before moving ahead with a contract as there are always risks associated with any type of contract you choose. Make sure you check recent reviews and provide as much information as possible when drawing up a contract in order to cover as many elements as you can. Any contract can be altered slightly from traditional templates to suit your specific build’s needs and budget, just check with the construction company for their terms a condition.