How to choose contract type for construction project?

Saad Iqbal | 🗓️Modified: February 11, 2023 | ⏳Read Time: 5 min | 👁Post Views: 49

Choosing the right type of contract for a construction project is crucial for ensuring that the project is completed on time, within budget, and to the desired quality standards.

Here are the steps to choose a type of contract for a construction project:

Steps to choose a contract type

  1. Define the project scope and objectives: Clearly define the project scope, objectives, and requirements. This will help you determine the type of contract that is best suited for the project.
  2. Assess project risks: Consider the potential risks associated with the project, such as cost overruns, delays, changes in scope, and quality issues. This will help you determine which type of contract best addresses these risks.
  3. Review the legal and regulatory framework: Ensure that the type of contract you choose is compliant with the legal and regulatory framework in your jurisdiction.
  4. Evaluate the resources and expertise of the parties involved: Consider the resources and expertise of the owner, contractor, and other parties involved in the project. This will help you determine the type of contract that is most suitable for the project and the parties involved.
  5. Consider the cost structure: Consider the cost structure of the project, including the budget, financing, and payment terms. This will help you determine the type of contract that provides the best cost certainty for the project.
  6. Evaluate the delivery method: Evaluate the delivery method of the project, including design-bid-build, design-build, and construction management. This will help you determine the type of contract that is best suited for the delivery method.
  7. Seek professional advice: Seek the advice of a construction lawyer, construction consultant, or other professional who can help you choose the right type of contract for your construction project.
  8. Negotiate the terms and conditions: Once you have selected a type of contract, negotiate the terms and conditions with the other parties involved. Ensure that the contract is clear, concise, and includes all relevant information, including the project scope, objectives, budget, payment terms, and risk management strategies.
House model with real estate agent and customer discussing for contract to buy house, insurance or loan real estate background.
House model with real estate agent and customer discussing for contract to buy house, insurance or loan real estate background.

Examples of different types of projects

There are several different types of construction projects, each with its own unique set of requirements and challenges. The type of contract that is best for a particular construction project will depend on several factors, including the scope of work, the budget, the level of risk involved, and the parties involved. Here are a few examples of construction projects and the types of contracts that are best suited for each:

High-Rise Building Construction:

For a high-rise building construction project, a Lump Sum Contract is often the best option. This type of contract provides a fixed price for the construction work, which provides cost certainty for the owner. The contractor assumes the risk of cost overruns, so it is important for the owner to carefully evaluate the contractor’s experience and qualifications before entering into a Lump Sum Contract.

Highway Construction:

For highway construction projects, a Design-Build Contract is often the preferred option. This type of contract combines the design and construction phases of the project, which can reduce the overall project duration and minimize the risk of cost overruns. The contractor is responsible for both the design and construction of the project, and the owner is able to transfer some of the risk to the contractor.

Water Treatment Facility:

For a water treatment facility construction project, a Build-Operate-Transfer (BOT) Contract may be the best option. This type of contract involves a private company financing, constructing, and operating the facility, and then transferring ownership to the government after a specified period of time. The BOT model allows the government to attract private investment for public infrastructure projects, while also transferring some of the risk to the private sector.

Power Plant Construction:

For a power plant construction project, a Turnkey Contract is often the preferred option. This type of contract involves a single entity that is responsible for the design, construction, and commissioning of the project. The turnkey contractor assumes the risk of cost overruns and is responsible for ensuring that the project is completed on time, within budget, and to the specified quality standards. This can be a good option for clients who have limited in-house resources and expertise, or who want to minimize their involvement in the project and transfer the risk to the contractor.

These are just a few examples of the types of construction projects and the contracts that are best suited for each. The type of contract that is best for a particular project will depend on several factors, and it is important for both the owner and contractor to carefully evaluate their needs and priorities before entering into a contract.

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