How Are Building Contracts Used?
Other People Are Reading
-
Building Contract Overview
-
When property owners and contractors agree to a builder/buyer relationship, the building contract is the framework of a successful project. Building contracts outline the plan for the start and finish of the project. They also contain detailed warranty information, and clearly define the payment process. Although a building contract is vital for many reasons, one of the most critical decisions involves reaching an agreement on the type of contract to use, either fixed price or time and materials.
Fixed-Price Contracts
-
With a fixed-price contract, the builder agrees to receive a set payment for the total project based on estimated costs. The builder accepts responsibility for additional costs beyond those specified in the contract. Then if he discovers obstructions that prevent the pouring of a foundation, for instance, the builder bears the cost in time and labor to remove the obstruction. Builders use a fixed-price contract to quell a buyer's fear of intemperate contractors. It protects the buyer from market influences, planning delays and unforeseen circumstances that may arise. A fixed-price contract also provides an incentive to the builder to finish the project below cost, thereby maximizing profit and avoiding loss while protecting the buyer's budget.
-
Time and Materials Contracts
-
A time and materials contract performs a similar task, only in reverse. It protects the builder from financial loss, while the buyer bears responsibility for added costs. Time and materials contracts are used primarily on building projects for which adequate cost estimates cannot be achieved, such as a large-scale remodeling project. Large remodeling jobs involve many variables that inhibit the builder's ability to make a sufficient analysis of cost. To name one example, the builder might discover unforeseen termite damage during renovations.
Start and Finish Dates
-
Using a building contract to define start and finish dates for a project serves two purposes. First, it protects the buyer from extended delays in completion of the project. Usually the wording of the contract imposes a fine for extensions beyond the contracted deadline. Second, the contract usually offers the builder an incentive for completion of a project ahead of schedule.
Warranty Information
-
Warranties vary according to the type of building project, but typically cover a minimum period of one year. Clearly outlining warranty information in the building contract protects the buyer from costs associated with the failure of covered items. It also protects the builder, since the warranty covers only items listed in the contract.
Payment Procedures
-
Another method of using the building contract to protect both the buyer and the builder is to include payment procedures. A building contract always includes payment terms, regardless of the type of contract. Fixed-price building contracts typically specify payment according to completion of specific stages of the project. Payment procedures in a fixed-price contract are tied to the start and finish dates. A time and materials building contract usually explains the procedure for the builder to turn in cost information at regular intervals in order to receive payment.
-
