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The Different Types of Construction Contracts

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Construction project management expert Mohammad Riaz serves as manager of National Restoration Group, Inc., where he is responsible for managing and completing construction projects that include high rise buildings in New York City. Mohammad Riaz also owns a contracting company that specializes in commercial building construction contracts.

A construction contract is a legal document that binds the contractor and the owner of the project. The contract includes a provision that states the amount of compensation and its manner of distribution at the completion of the project, depending on the type of contract the parties have signed.

Here are the different types of construction contracts:

– The fixed-price or lump-sum contract provides for the total fixed price of all the phases and activities of the project. This type of contract is preferred for projects with a clear scope and definite schedule. This contract is also favorable to project owners who do not want any unspecified changes in the scope of work as the contract shifts all related risks to the contractor.

– The cost-plus contract includes the payment for actual costs plus purchases and other expenses that are directly related to the project. This contract contains information on a pre-negotiated amount that includes the profit and overhead expenses of the contract. In this type of contract, costs are detailed and categorized as direct or indirect.

– The time and materials contract is preferred for projects without a clearly defined scope of work. The contractor and the owner agree on an hourly or a daily rate plus extra expenses that become necessary as the project progresses. This type of contract is favored for projects with small scopes.

– The unit pricing contract is used for contracting with federal agencies. During the bidding process, the owner sets unit prices and quantities for specific unitized items. As the project progresses, the unit prices may be adjusted as the scope changes.

How Are Bids and Estimates Different in Construction?

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A New York-based business manager, Mohammad Riaz leads National Restoration Group, Inc., in the Bronx. With his guidance, the company provides a range of services, including masonry, structural, waterproofing, rehabs, and roofing services. In his capacity as manager, Mohammad Riaz handles the bidding process for all projects.

In construction, many people use the terms “estimate” and “bid” interchangeably. However, the two terms have very different implications in terms of price and scope of various projects.

Of the two, estimates are more flexible. These provide customers with information about the expected cost of a certain project. While estimates should be as accurate as possible, there is no expectation that they are 100 percent accurate. Rather, they provide customers with a ballpark figure of the cost of the project, and the actual cost of the project may be either above or below the estimated value.

The purpose of providing an estimate to customers is to manage client expectations. Estimates do not overwhelm clients by providing too many details about the project, but are still accurate enough to help clients compare different contractors and other professionals.

Meanwhile, construction bids are much more precise since they typically represent the final price that is charged to the customer. They are firm offers, and are typically only used when the scope of a proposed project is clearly defined. This is essential for construction professionals because they must evaluate the material, labor, profit, and other costs associated with doing the project to ensure they create an accurate bid.

Due to the fact that creating an accurate bid requires much more effort, customers rarely request a formal bid unless they are genuinely interested in doing business with a particular company. Further, once a customer accepts a bid, companies must adhere to the cost and process outlined in it.