Construction Contracts: Main Types & Use Cases
Reading time: 12 minutes
Construction contracts are legally binding agreements between both parties involved, and set out work timescales, rights, obligations and expectations from both the client and contractor. Construction contracts may also cover how to resolve disputes, termination of work notices and risk management. The different types of construction contract available helps clarify expectations, to get everyone on the same page, as well as giving a level of protection for both the contractor and client. The contract aims to avoid risks of misunderstandings, by clearly setting out expectations before any work starts.
It’s vital to be aware of the latest building regulations when drawing up a construction contract, as new rules may mean additional procedures must be put in place before the building inspector can sign off any work.
Table of contents
What are the main types of contracts in construction?
Construction contracts in the UK are usually in the form of standard forms, modified standard forms or bespoke contracts. The most popular types of construction contract usually fall under the Standard Form Contracts category (SFC). SFCs aim to reduce the time and effort needed to negotiate the contract terms.
There are eight commonly used standard construction contract types:
-
Subcontractor contracts
-
Design-build contracts
-
Guaranteed maximum price
-
Unit price contracts
-
Cost-plus contracts
-
Time and materials contracts
-
Lump sum contracts
-
Fixed-price contracts
What is the most commonly used construction contract?
Lump sum contracts (also sometimes known as ‘fixed price contracts’) are usually considered the most popular type of contract when it comes to building and engineering agreements, however they do have minor differences. Whilst the set price aspect has obvious benefits for the client, it does allow constructors to accurately estimate the costs they will incur throughout the project.
It’s important to note that although ‘lump sum contracts’ are the most popular type of construction contract, it doesn’t mean they are automatically the best option for every project. Each contract type has its own benefits and potential drawbacks - depending on the size, scale and scope of the build or renovation - and each can usually be tailored to the individual project.
The most common providers of construction contracts in the UK are:
In order for a construction contract to be enforceable and legally binding, it must cover these five key areas:
-
Intention - what will happen, when and how
-
Capacity - if all parties have capacity to agree
-
Agreement - details of the offer and acceptance by both parties
-
Certainty of terms - which terms are being set out
-
Consideration - who will provide the services and payment schedules
Subcontractor contracts
A subcontractor contract is where a separate party agrees to undertake some of the work on behalf of the original contractor. This could be an individual or another company. In this instance, a separate contract will be needed between the contractor and the subcontractor. The advantages are it allows the contractor to use specialist services to assist with the project, such as a certified gas-safe engineer installing underfloor heating as part of the build. The disadvantages might be that the client will hold the main contractor accountable for all the work.
Every subcontractor contract agreement should include:
-
Business information
-
Scope of the work
-
Payment terms
-
Change orders
-
Licensing and business insurance
-
Dispute resolution
-
Termination
-
Flow-down provisions
Design-build contracts
A design and build contract is where the tasks of designing and building are simultaneously done, which can often save time and money for both parties. The architect and builder work closely together in a collaborative way, which can streamline the process. For the client, there is one single point of contact and responsibility which can make things more straightforward, and there is a certain amount of flexibility required which can be beneficial for all sides. With this collaboration though can come downsides, such as increased costs when ideas change, and having to rely on other specialties.
Guaranteed maximum price
A guaranteed maximum price contract (also known as a ‘not to exceed price’ or ‘guaranteed fixed fee contract’) is as you’d expect - a contractor will work out a maximum price for the client for the project. This sort of contract requires a highly detailed breakdown of all the works in order to accurately estimate costs and overheads, yet it can often be clearer to work out profits.
The pros for the client are the obvious cost certainty - being able to budget successfully and manage the costs coming in, as well as control over-spends. It can encourage savings overall by incentivising contractors to work efficiently.
For the contractor it may help to win new client contracts, as a popular option for homeowners with tighter budgets. There are risks involved, however - such as unexpected costs and unavoidable delays, including inflation and price rises for materials, or availability of sub-contractors and staff. It’s vital that the contract includes a maximum threshold, as well as clear terms to discuss unforeseen price rises in exceptional circumstances.
Unit price contracts
A unit price contract sets out separate prices for each area of the work (such as building materials, labour, overtime etc) and the client pays the contractor based on the pre-agreed ‘unit’ rates.
The benefit for the client is the transparent pricing, flexibility if unforeseen costs come up and the ability to keep on top of construction budgets. For the contractor, it takes away some of the risk which comes with guaranteed maximum price as it’s a more accurate dynamic estimate that offers flexibility in unforeseen circumstances, meaning a more accurate payment for the actual work.
This sort of contract is usually better for projects which have repetitive work, such as a series of new bathroom suites in a hotel or straightforward roofing jobs, which can also make invoicing much easier. For complex jobs with varying materials and tasks it can be less easy to estimate in advance, and may mean a complicated invoicing system and less incentive for sub-contractors to work efficiently.
Cost-plus contracts
Cost-plus contracts mean that contractors are paid for all their expenses (the ‘cost’, which includes staff, mileage, supplies etc) with the ‘plus’ being a pre-agreed profit.
This type of contract is popular with many contractors as the transparent pricing means very little risk for loss of profit, plus it gets around problems associated with price rises for materials and labour. It does however mean keeping a detailed track of all costs, labour and supplies.
For the client it means contractors often prioritise quality as they don’t need to cut corners to ensure they still make a profit, but with this comes the risk of the work going over-budget. For this reason, many of these contracts include a maximum amount which can be spent. A cost-plus contract might be ideal in a situation where the full extent of the work is uncertain, such as a large renovation on a character property with potentially hidden problems.
Time and materials contracts
A time and materials contract (also known as T&M) combines some of the aspects of both the cost-plus and lump-sum contracts, where the client pays an agreed price to cover the contractor’s costs and profit.
This sort of contract can offer flexibility by clearly setting out hourly rates for labour, as well as estimated prices for materials.
For the client it’s straightforward and allows them to keep more on top of costs for budgeting, but the costs are less transparent in the case of changing material prices and the amount to pay may well go up.
The benefit for the contractor is reducing the risk of loss from fluctuating staff and materials prices, but the downside may be that the contract management side can be time consuming. An example of when this type of contract might be used is when the final scope of work is unclear, if there have been recent updates to the building regulations which mean additional supplies and inspections, or if labour and material prices or availability are unstable.
Lump sum contracts
Lump sum contracts are when a contractor completes a project at a pre-agreed price. However, it’s important to note that - unlike guaranteed maximum price contracts - the costs can fluctuate in exceptional circumstances. As details of labour, materials and other costs aren’t set out in detail it is often a straightforward contract to prepare and agree on with the client, which cuts down on admin time.
For clients, the benefits include an agreed price - knowing costs in advance to keep on top of budgets - as well as encouraging a timely completion.
For contractors, the benefits include a simpler invoicing system, but can present a risk for loss of profit if staff or supply costs increase or if additional work is needed. Of course, it also means if there are savings to be made the contractor can benefit from this. These contracts are usually better for simpler or low-risk projects with a defined scope of work, such as new glazing or decorating, or smaller jobs such as installing decking.
Fixed-price contracts
Like lump sum contracts, fixed price contracts also have a pre-agreed price between the contractor and client. However, these are not usually able to fluctuate in case of changing materials or labour costs. This contract includes all the set price benefits of the lump sum contract for clients, to assist with budgeting, but some clients find that they may overpay for services as the contractor builds in a buffer in case of risk. Again, due to the potential financial risks for the contractor these contacts are better for projects with fixed scope or straightforward jobs, with less risk of profit loss.
It’s important to remember that different projects often call for different types of contract. Many overlap with their pros and cons, but it’s often down to the complexity of the job and the client’s preference to determine which contract is the best fit. To find out more about planning any construction project, visit the Travis Perkins trade news and advice section.
Construction contracts: FAQs
What are the standard contracts in construction?
There are eight commonly used standard construction contract types:
-
Subcontractor contracts
-
Design-build contracts
-
Guaranteed maximum price
-
Unit price contracts
-
Cost-plus contracts
-
Time and materials contracts
-
Lump sum contracts
-
Fixed-price contracts
Each has its own benefits and potential drawbacks - depending on the size, scale and scope of the project - and each can be tailored to the individual building project.
What are the 3 types of contracts in construction?
Construction contracts in the UK are usually in the form of standard forms, modified standard forms or bespoke contracts. The most popular types of construction contract usually fall under the Standard Form Contracts category (SFC).
What are the 5 elements of a construction contract?
In order for a construction contract to be enforceable and legally binding, it must cover these five key areas:
-
Intention - what will happen, when and how
-
Capacity - if all parties have capacity to agree
-
Agreement - details of the offer and acceptance by both parties
-
Certainty of terms - which terms are being set out
-
Consideration - who will provide the services and payment schedules
What is the best type of contract?
It’s important to note that although ‘lump sum contracts’ are the most popular type of construction contract, it doesn’t mean they are automatically the best option for every project. Each contract type has its own benefits and potential drawbacks - depending on the size, scale and scope of the build or renovation - and each can usually be tailored to the individual project.
How to get construction contracts
Price and reliability are vitally important to clients who are looking for contractors. It’s a good idea to get your quote (or tender) in swiftly and make sure it’s a fair yet realistic price to preserve your profit. When you succeed in securing the job, clients may want to negotiate which type of construction contract is used. The most common providers of construction contracts in the UK are:
-
The New Engineering Contract (NEC)
-
The Joint Contracts Tribunal (JCT)
Disclaimer: Information displayed in this article is correct at the time of publication, but note that legislation changes periodically. The information contained on this page is intended as an overall introduction and is not intended as advice from a professional building control officer or electrician. Travis Perkins aims to avoid, but accepts no liability, in the case that any information stated is out of date. Always consult the approved local authority building control team before undertaking any work.