Understanding the Different Types of Construction Contracts

29 April 2023 in Building and Construction Law

Construction projects involve a lot of complexities, and to ensure successful completion, it is essential to have a contract in place that outlines all the key elements of the transaction. There are various types of building and construction contracts, and choosing the right one depends on the expertise of the parties involved and the nature of the project. This article will explore the different types of construction contracts and the benefits and limitations of each. 

Construction Only Contract

A Construction Only Contract is a type of contract where the builder is engaged to provide construction services only. In this type of contract, the owner or principal provides the design documents and details to the builder. The builder is obligated to undertake the construction work in strict accordance with the design provided by the owner or principal.

This type of contract is common in situations where the owner or principal has a clear understanding of the design requirements and simply needs a builder to construct the project according to those requirements. It is also useful in situations where the owner or principal has already engaged a designer to prepare the design and now needs a builder to complete the construction work. As such, a Construction Only Contract is a straightforward and efficient way for owners or principals to engage builders to carry out construction work on their behalf.

Design and Construction Contract

A Design and Construction Contract is a type of contract in which the designer and builder collaborate to provide both the design and construction services for a project. In this type of contract, the owner or principal typically provides performance criteria or a concept, and the designer and builder work together to develop a design that meets those criteria. Often, the designer and builder (which may be one party) will also work with other subcontractors, such as engineers and architects, to ensure the design is feasible and meets regulatory requirements.

Once the design is finalised, the builder will construct the project according to the agreed-upon design. This type of contract is useful for complex or large engineering projects, where close collaboration between the designer and builder is necessary to ensure the project is completed successfully. With a Design and Construction Contract, the owner or principal can benefit from a more integrated approach, as the designer and builder work together from the outset to provide a seamless service that meets all of their needs.

Project Management Contract

A Project Management Contract is a type of contract in which the owner or principal engages a party, usually an engineer or construction manager, to manage the construction contract on their behalf. In this type of contract, the project manager acts as the owner’s representative and is responsible for overseeing the construction process, ensuring that the work is completed on time, within budget and to the required quality standards.

The project manager’s role typically involves coordinating the work of various contractors and subcontractors, managing project schedules, and monitoring progress to ensure that the project stays on track. They may also be responsible for managing project risks, resolving any disputes that arise during the construction process and ensuring that all regulatory requirements are met. By engaging a project manager, the owner or principal can benefit from their expertise and experience in managing complex construction projects, while also freeing up their own time to focus on other aspects of their business.

Fixed Price Contract

A Fixed Price Contract is a type of contract in which the price for the work is fixed and agreed upon by both the owner or principal and the contractor. In this type of contract, the contractor is responsible for completing the project according to the agreed-upon scope of work, quality standards and timeframe, and takes on the risk of possible delays or overspending. The owner or principal, on the other hand, has the peace of mind of knowing that the project will be completed within the agreed-upon budget.

While a Fixed Price Contract is often used in construction projects where the scope of work is well-defined, it is also useful in situations where the owner or principal requires certainty about the project costs. However, there are some exclusions to this risk allocation that must be set out in the contract, such as the risk of unforeseen ground conditions that may cause additional costs, and variations in scope directed by the owner or principal. By carefully defining the scope of work and setting out any exclusions in the contract, both the owner or principal and the contractor will have a clear understanding of their obligations, and the project can proceed without any unexpected costs or delays.

Cost Plus Contract 

A Cost Plus Contract is a type of contract in which the contractor is reimbursed for the actual cost of the materials and labour used in the project, plus a pre-determined fee or percentage of the total cost. In this type of contract, the owner or principal will direct the builder to perform any works and pay the builder for the cost of materials and labour. The contractor’s fee or percentage is typically negotiated and agreed upon before the project begins and may be adjusted in certain circumstances.

One of the main advantages of a Cost Plus Contract is that it allows the owner or principal to have greater flexibility in the scope of work and to make changes or additions to the project as required. However, it also places a significant amount of price risk on the owner or principal, who is responsible for paying for any extra costs that arise during the project. For this reason, Cost Plus Contracts should only be used by sophisticated owners or principals who are experienced in managing construction projects and understand the potential risks involved.

Home Building Contract

A Home Building Contract is a type of contract that is specifically drafted for the construction of residential buildings. These contracts are governed by the Home Building Act 1989 (NSW), which sets out a range of legal requirements that must be met by both the owner or principal and the contractor. These requirements include things like the essential terms in a home building contract, mandatory warranties, cooling-off periods and dispute resolution processes.

Under a Home Building Contract, the contractor is responsible for completing the construction work according to the agreed-upon plans, specifications and timeframe. The owner or principal, on the other hand, is responsible for paying the contractor the agreed-upon price for the work, as well as any variations or additions that are agreed upon during the project. It is important for both parties to carefully review and understand the terms of the contract before signing to ensure that their rights and obligations are clearly defined and that there are no misunderstandings or disputes later on.