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A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions recorded in document form. The two parties involved are one or more owners, and one or more contractors. The owner has full authority to decide what type of contract should be used for a specific development to be constructed and to set forth the legally-binding terms and conditions in a contractual agreement.[1] A construction contract is an important piece of document that outlines the scope of work, risks, duties, and legal rights of both the contractor and the owner. `



The ten types of contracts are:

  • Lump sum contract
  • Commercial contract
  • Domestic building contract[2]
  • Percentage rate contract
  • Item rate contract or Unit price contract
  • Lump sum and scheduled contract[3]
  • Cost plus fixed fee contract
  • Cost plus percentage of cost contract
  • Subcontract agreement [4]
  • Special contracts[5]

Lump sum contractEdit

In a lump sum contract an owner agrees to pay a contractor a specified lump sum after the completion of work without a cost breakdown.[6][7] After work no detailed measurements is required.

Lump sum and scheduled contractEdit

In lump sum contract the complete work as per plan and specifications is carried out by contractor for certain fixed amount as per agreement. The owner provides required information and contractor charges certain amount. This contract is suitable when the number of items are limited or when it is possible to work out exact quantities of work to be executed. The detailed specifications of all items of work, plans and detail drawings, security deposit, penalty, progress and other condition of contract are included in agreement.Though it is lump sum and scheduled contract, contractor will be paid at regular interval of 2-3 months as per progress of work on the basis of certificate issued by engineer in charge. A scheduled of rate is included in agreement for making payment of extra items.

Under a lump sum contract, a “fixed price” for the work to be done is agreed upon by the client and contractor before the work begins. This contract can also be applied to both home building and commercial contracts. It can be more of a risk to the contractor as there are fewer mechanisms to allow them to vary their price.

Commercial contractsEdit

A commercial contract is an agreement containing all the work that should be performed for the construction of a commercial building or non-residential building. A skillfully constructed commercial contract can protect your interests, minimize risks, and increase profitability.

Domestic construction contractsEdit

A domestic building contract is an agreement containing all the work that should be performed for the construction of a commercial or residential building existing or occurring inside a particular country; not foreign or international.

Percentage rate contractEdit

When the lowest rate and comparative position among the contractors are already specified prior to the opening of the tender, then the percentage rate contract is used. Percentage contract is a type of contract where there is no possibility of unbalanced tender.

Cost plus fixed fee contractEdit

In cost plus fixed fee, the owner pays the contractor an agreed amount over and above the documented cost of work.[8]

A cost plus contract states that a client agrees to reimburse a construction company for building expenses such as labor, materials, and other costs, plus additional payment usually stated as a percentage of the contract’s full price.

This type of construction contract is an alternative to lump sum agreements. It allows flexibility and transparency for the homeowner, and reduces the risk for a contractor since a Cost Plus construction contract guarantees them a profit.

Cost plus percentage of cost contractEdit

In cost plus percentage, the owner pays greater than 100 percent of the documented cost, usually requiring detailed expense accounting.[9] In this type of contract, contractor is paid the actual cost of work plus certain percentage as profit. Various contract documents, drawing, specifications are not necessary at the time of signing the agreement.Contractor has to keep all records for cost of material and labour and contractor will be paid accordingly to engineer incharge. This type of contract is suitable for emergency work like difficulties in foundation conditions, construction of expensive structure etc.

Subcontract agreementEdit

A subcontractor agreement is a contract primarily between a builder or a principal contractor and subcontractor. It outlines the perimeters of specialist work to be done for the construction project. [4]

Special contractsEdit

Special contracts are further classified into five types:

  • Turn key contract
  • Negotiated contract
  • Package contract
  • Continuing contract
  • Running contract[10]

See alsoEdit


  1. ^ "Main types of contracts". Retrieved 23 October 2014.
  2. ^ "Building Contracts". Retrieved 23 October 2014.
  3. ^ "Common types of construction contracts". Retrieved 23 October 2014.
  4. ^ a b "Construction contracts". Retrieved 20 October 2014.
  5. ^ Dr. B.C Punmia (2014). A text book of Production Planning and Management.
  6. ^ "Business dictionary". Retrieved 17 October 2014.
  7. ^ "Lump sum contract". Retrieved 17 October 2014.
  8. ^ "India study channel". by Owais Khursheed. Retrieved 17 October 2014.
  9. ^ "Cost plus percentage of cost contract". by Owais Khursheed. Retrieved 20 October 2014.
  10. ^ Dr. B.C. Punmia (17 October 2014). Production Planning and Management.