Choosing a contract format can be confusing when considering a renovation or home build. Your relationship with your contractor should help guide you on which format you feel most comfortable with.
A Construction Contract is a signed agreement between a builder or renovator, and their client. The contract outlines all items specific to the project, such as scheduling, sub trade agreements, payment formats, risk assumption, etc.
There are generally 4 styles of contract used for renovations and custom home builds.
Fixed Price Contract (Quoted)
In this contract, there is one fixed price for all quoted items agreed upon, this would be paid to the contractor directly on a predetermined schedule. This style is ideal when there is a very clear scope of work and defined schedule. This contract may often include incentives for early completion, or penalties for late completion.
This contract places more risk on the contractor for project uncertainties and unforeseen costs, and they will generally include a percentage over and above in order to compensate for carrying that risk. This percentage is often unknown to the client.
Cost Plus Management Fee
In this contract, the homeowner pays all project related costs. The homeowner can either pay the contractor for project costs, or they can pay the vendors directly, the contractor will then be paid an agreed upon percentage of the costs by the homeowner as a management fee.
This contract leaves the risk of uncertainties and unforeseen costs with the homeowner, however the contractors profits and very clear to the owner, and if there are minimal unforeseen projects costs this may be the beast deal for the homeowner.
Fixed Price Management Fee
In this contract, the homeowner pays all projects related costs. The homeowner can either pay the contractor for project costs, or they can pay the vendors directly. The contractor will be paid a management fee separate to costs, generally that would be a fixed amount, paid monthly for management services.
Time and Material
Time and Material contracts are the preferred arrangement when scope of work and schedule is unclear. The contractor and homeowner will agree upon a defined hourly rate and payment structure.