What type of contract do you want with a contractor?
Most people don’t know that there are options when it comes to contracts with contractors. But its important to realize that you are in far more control of direction and investment amount in your project than simply picking out a budget.
So lets go over the basics;
1. Cost plus
This allows for a free flowing budget based on the amount the contractor can get the project completed for. This will let you see every aspect of the projects expenses. Each item completed will have its cost presented to you (the client) and a “contractors fee” tied to that project. i.e. Drywall work – will have that trades invoice presented to the client along with a contingent release of lien and with the contractors overhead and profit invoice.
Trades Invoice= $2000.00
Contractors O&P @ 20%= $400.00
Total to be paid= $2,400.00
This method of billing and contract will allow you to know what was paid and to whom it was paid in every aspect of your project. As well as allow either you or your contractor to pay the trades.
2. Cost plus not to exceed
This form of agreement is very similar to the first way, but it denotes that the total scope of work is to be completed without going over a predetermined investment.
3. Standard agreement fixed price limited scope of work
A typical contract with a contractor will include a standard agreement with a scope of work and a fixed price. This contract is at an advantage of contractors who can word the documentation and scope in a way that allows for items that will need to be done to complete the project out of the documentation. Allowing for “change orders” and increasing the agreed amount. This agreement offers very little flexibility and does not require the client to be informed of any savings nor does it require that any effected aspects of the project be itemized prior to the start of the project. Typically these contracts are great if the client has knowledge of construction as well as a trusting working relationship with the contractor. Typically in this form of agreement the contractor pays the trades out of the invoices and you are not given knowledge of what was paid to each trade. Even though you are given a release of lien that is all encompassing via the contractor, you rely on his/her good word to ensure all trades were paid.
4. Standard agreement no limit no scope
This is the most dangerous form of contract. This method allows for the contractor to do anything they see fit in order to complete your project. This gives free will to the contractor to hire anyone they like for any aspect of the project and can bill you for things outside of the original scope after the work is completed. This form of agreement is NEVER recommend.
5. Construction Manager agreement
A standard form of agreement between owner and contractor for use on projects where the basis of payment is either a stipulated sum (fixed price) or cost of the work plus a fee, with or without a guaranteed maximum price. In addition to the contractor and the architect, a construction manager assists the owner in an advisory capacity during design and construction. This agreement typically leaves the sole responsibility of payment of all materials and trades to the client.
6. Cost Plus with incentive fee
This is the same as cost plus (maximum or none) that will give a percentage back to the contractor for any savings that is accumulated by completion of the project. This will allow for motivation for the contractor to be frugal with the clients money. Additionally “Time” completions will give a set fee for early completion to a project. Typically these time fee’s will be awarded on commercial structures.
Make sure that you know what you are getting in the contracts. Not only the items that are to be completed, but the grade of materials, the warranty you will receive (labor and material) As well as if supervision is included (project manager). The number of meetings allowed as well as the payment schedule. Time lines as well as reward/penalties noted in the contract are vitally important.