Construction Contracts: A Complete Guide to Types, Terms and Best Practices

Every construction project involves multiple parties, budgets and strict deadlines. With this in mind, having the right construction contract in place is essential for protecting everyone involved. Construction contracts lay out the scope of the work, payment terms, timelines, responsibilities and much more.

Whether you’re working on a small domestic project or a large-scale commercial development, the contract provides the legal framework that keeps the project organised and reduces the risk.

At Contractwise, we’re experts in the construction industry, especially when it comes to CIS compliance. With services like payroll audits that eliminate the risk of HMRC reclassification, we protect contractors and subcontractors. Therefore, we have a thorough knowledge of construction contracts and have put together this comprehensive guide outlining everything you need to know.

Read on for more information…       

What is a construction contract?

A construction contract is a legally binding agreement between the parties involved in a construction project. Typically, a contract is made between a client and the contractor, although it may also include subcontractors, consultants, suppliers and other construction professionals.

Construction contracts include a wide range of details, including:

• Scope of the work
• Project timelines
• Payment schedules
• Materials
• Insurance requirements
• Dispute resolution procedures
• Termination clauses
• And more

These agreements are extremely important because they reduce misunderstandings and provide legal protection if issues arise. In the UK, standard forms of contracts like JCT and NEC are usually the most commonly used frameworks because they provide industry-standard terms.

Different types of construction contracts

There is a wide range of contract types in construction. Let’s take a look at the most common types:

Subcontractor contracts

Subcontractor contracts are agreements between the main contractor and subcontractors that are hired to complete specific parts of the project. These contracts are commonly used for trades like electricians, plumbers and roofers. The subcontractor is responsible for completing their section of work.

These contract types are especially helpful when it comes to delegating specialist tasks on a construction project. Normally, a subcontractor contract will include payment terms, scope of work, deadlines and other expectations.

Design-build contracts

Design-build contracts combine both the design and construction phases into a single agreement. Architects and builders work together, streamlining the entire process and potentially reducing project timelines.

These contract types often lead to improved collaboration and faster decision-making, but can sometimes include increased costs.

Guaranteed maximum price contracts

A guaranteed maximum price contract sets a maximum cost that the client will pay for the project. If the actual cost exceeds the agreed-upon amount, the contractor will generally cover the difference. This type of contract provides clients with complete protection from soaring costs, a big benefit as construction often goes over budget.

This arrangement usually encourages the main contractor to manage costs more carefully and avoid unnecessary spending.  

Unit price contracts

Unit price contracts are based on fixed prices for individual units of work rather than providing a total project cost. The final project price will depend on the number of units completed during construction. For example, road construction projects may charge per mile of road built.

The main benefit of this is that it provides transparency on pricing, and it is useful when the quantity of work cannot be accurately determined at the start of the project. It provides flexibility because clients only pay for the actual amount of work completed.

Cost-plus contracts

Cost-plus contracts require the client to pay for all the contractor's expenses. This type of agreement is often used when the project scope is uncertain or likely to change during the construction process.

The main advantage of this is that it means contractors will not lose out on profit. Furthermore, it offers great flexibility. Contractors can get to work before every detail has been finalised, customising the project as they progress. This can help save time on fast-moving projects. Clients also benefit from great transparency as they can review prices in real time.

Time and materials contracts

Time and materials contacts are based on the actual hours worked and the materials used during the project. Contractors will charge an agreed rate (usually hourly or daily) and add the cost of materials separately.

This type of contract offers flexibility as changes can easily be accommodated as the project progresses.

Lump sum contracts

Lump sum contracts are one of the most widely used in the construction industry. Under this type of arrangement, the contractor agrees to complete the entire project for a fixed price. The agreed amount will usually include labour, materials and equipment.

These contracts work best when the project scope and specification are clearly defined. Clients benefit from predictable pricing and easy-to-understand budgets while contractors can manage their own costs more efficiently.  

Fixed-price contracts

Fixed-price contracts are similar to lump sum contracts. The contractor will agree to complete the work for a predetermined amount. These agreements provide clients with strong cost certainty, and they are commonly used for projects that have detailed plans.

The biggest benefit of these contracts is the financial predictability they offer. Clients will know the expected project cost from the outset, which makes budgeting easier.  

What are the most commonly used construction contracts?

Lump sum contracts are generally considered the most common in the construction industry. They are popular among all types of building projects and offer a wide range of benefits, including:

• Clear predictable costs
• Easier budgeting for clients and developers
• Simple payment structures
• Encourages efficiency
• Easier comparison between contractor bids
• Reduced administrative complexity
• Suitable for projects with a clear scope

Despite their clear popularity, lump sum contracts are not the best for everyone. More complex projects with changing requirements might benefit from more flexible contracts.

Construction contracts are a critical part of every building project because they clearly define responsibilities. Different types of contracts are designed to suit different project requirements. Understanding the key differences will help you decide what type of contract is best for you. CIS compliance is another important consideration for construction professionals, and Contractwise is here to help with all these obligations. Contact us today to find out more.