Construction contracts are the lifeblood of any construction company. But they’re not all created equal – here we outline the main types of construction contracts in the UK.
What is a construction contract?
In its most basic form, a construction contract is a legally binding agreement between one or more property owners and one or multiple contractors – for the undertaking of construction operations. A contract will set out the scope of work, plus the responsibilities and legal rights of both parties.
But what are standard forms of construction contracts? Here we detail some of those in everyday use in the UK.
What are the different types of construction contracts in the UK?
With different types of construction contracts come different client expectations, payment methods and risks. Make sure you don’t get any unpleasant surprises: find out about some of the most common contracts.
Under a fixed-price contract, all costs are agreed before any works start. As well as materials and labour costs, it’ll also include necessary equipment and overheads.
Although this type of contract details a definite amount to be paid, it doesn’t usually include a lump sum payment. Instead, it normally involves instalments being paid after certain milestones are reached, or at specified times, such as every two weeks or month, for example.
While contractors have the security of a pre-agreed price, you must estimate your costs very carefully – to make sure you don’t leave yourself out of pocket. Another way you could lose out is if unexpected costs crop up or you incur penalties for going over schedule. Some contracts might even have clauses that detail a fine for every week you go over.
However, if you estimate your costs well and can get the job done without any delays, a fixed-price contract can work out well.
One more consideration is that there could be a change order process involved. If this is the case, any extra works or materials have to be signed off by whoever owns the project, in an official process, which can take time.
This type of contract applies where the owner purchases all materials and equipment needed for the job, and agrees to pay the contractor a fixed percentage to carry the project out.
This percentage could replace labour costs, or come on top of them, and will be calculated according to the square meterage of the job. Alternatively, it could be dependent upon the resulting value of a residential property.
This type of contract is normally used when the owner wants to decide upon materials and suppliers themselves, perhaps in the hope of minimising costs. Although this can result in time-consuming discussions around materials’ suitability, it can save you from unexpected costs.
Time and material contracts
This is when a contractor estimates a price, based upon the cost of materials and the projected time required for the job. It might also be termed a ‘cost only’ contract. They allow jobs to evolve, with a fluid scope of work.
These contracts offer you a degree of security, because you’re certain to recoup money spent on materials and you’ll also receive a fixed sum for labour costs. If there are any unexpected twists and turns in the project, it’s the owners that end up paying for them.
The only downside is that you must commit time to being accurate about your costs, carefully logging all materials, or you risk losing out.
If progress goes better than expected, on the other hand, the contractor might receive a bonus.
Guaranteed maximum price contracts
A guaranteed maximum price (GMP) contract places an upper limit on costs payable by the owner. Anything over and above that limit is your responsibility. If final costs come in below the GMP, however, it’s common for owners to share the savings with the contractor.
This type of contract is best suited to jobs with few unknowns, such as constructing a franchise property or a new-build housing development, for example.
To protect themselves against going over budget, many contractors will drive a hard bargain and give themselves a buffer. This can lead to prolonged negotiations between owners and contractors.
Unit price contracts
This is where a job is broken up into units of work, with estimates provided for each. These contracts are often used for jobs where the amount of work required isn’t fully understood before works begin or material costs are an important factor.
Although this can lead to owners paying more than they initially planned to, once the cost of a unit is established, there is much greater transparency. It’s easier for owners to understand the costs that make up the total cost, with extra work added as standardly priced units. This also allows for straightforward invoicing.
One threat to this transparency and simplicity when a unit is remeasured, a scenario which will obviously cause delays.
Unit price contracts are sometimes known as measure and pay contracts, measurement contracts or remeasurement contracts.
What should be considered when determining a construction project contract?
Cashflow is an important consideration when weighing up a certain type of contract. For example, if you’re expected to purchase materials up front yourself, you need to bear this considerable expense in mind.
Then there’s the question of how long a job will take. As any experienced contractor will know, quoting for a project is not an exact science. Weather, manpower, availability of other contractors – these are all factors that can see a job become delayed and stretch out.
Allied to this, it can often be difficult to stay within a budget, particularly if a job doesn’t go to plan or a client changes their mind. Naturally, it’ll be easier to estimate costs and timings if you’ve carried out similar jobs before.
If you don’t have much flexibility in terms of budget or timeframes, a fixed-term or fixed-price contract might be the best option for you. A time and material contract will also protect you against any surprise costs. While these types of contracts offer you security, they will, however, also restrict your ability to make profits.
How to win construction contracts
Of course, the main consideration when evaluating construction jobs is profit, although the prestige of a project and the time involved will also play their role. Once you’ve identified a project, it’s time to bid for it.
Be detailed in your tender. As well as outlining specific plans for the job, you might also want to include your productivity data and highlight the return on investment the client can expect. It can also be advantageous to include information about subcontractors you have relationships with, so that the project owner sees you can react quickly to any unexpected changes in the scope of work.
While you should be careful to spend sufficient time on your tender, it’s always a good idea to respond to a request for proposal early on. If you’re one of the first companies to get a bid in and have proposed a workable solution, you’ll certainly be among the favourites to land the project.
What do clients look for in a bidder?
A balanced budget: While the bottom line is undoubtedly a huge factor in any decision, clients will also want to see the benefits of your bid weighed against the budget.
Trustworthiness: If you’re in a client’s contact network, they’re more likely to favour your bid. But even if you’re not, you can still show them – through accreditations and testimonials – that you’re trustworthy.
Experience: Showcase your past work and highlight your team’s expertise. If a project owner can see you’ve done a similar job before, they’ll be more willing to let you take the reins on their project.
Flexibility: Bigger jobs rarely go to plan because there are so many variables and stakeholders. If you can show that you’ve been flexible on previous projects, clients will know you can adapt to changing requirements again.
From the owner’s needs to material costs, and timeline pressures to project complexity, each job is different to the last. Although you might have a preference for a certain type of contract, it always makes sense to weigh all the various factors up before you sign on the dotted line.
Once you’ve signed it, you’re committed to the terms of the contract, so make sure you only enter into a contract that works for you.