We’ve said it before and we will say it again: if you are a contractor, hiring a contractor, or you are involved in the business of construction in any way, you cannot afford to neglect utilizing strong, thorough contracts in your business dealings.
There is simply too much at stake and too much that can go wrong for you to not have a solid legal foundation supporting your actions and your interests. Construction contracts cannot guarantee that you will never have to deal with a lawsuit, but they will mitigate your risk and give you something legitimate and legally defensible for you to fall back on if things go awry.
Payment for a construction job in particular can be a lightning rod for people to attempt to take advantage of a situation by underpaying or overcharging. A good construction contact needs to explicitly detail how and when payment will occur and make provisions for unexpected developments or changes in the way the job will be completed.
Generally, there are three main classifications of payment for a construction job that need to be detailed in your contracts, depending on the circumstances of the work. We’ve detailed these three classifications below:
A lump-sum contract places almost the entirety of the risk on the contractor. This is the most common form of payment classification in construction contracts and is characterized by an agreed upon fixed price for an agreed upon amount of work. If the contractor is able to do the job for less than the lump sum, he or she will still be entitled to full payment of the lump sum, which means an increase in profits. Conversely, if they are not able to complete the work within the lump sum budget, he or she must foot the bill to cover the difference. When calculating a lump-sum payment contract, the contractor needs to plan for any contingencies or unexpected costs and build them into the fixed price.
This form of payment classification is normally utilized when there is easily quantifiable work that needs to be completed, as opposed to more complex construction projects. Unit price payment is when a specific price is known for a task, but not necessarily the quantities of the product needed to complete the task. The owner agrees to pay for however much of the unit is used to complete the scope of work. For example, the contractor may know the price for certain quantities of concrete needed to complete a project, but not exactly how much concrete he or she will need. Thus, the owner agrees to pay an amount of money per an amount of concrete up to however much it takes to complete the job. Unit price payment could be combined with other forms of payment, like lump sum, to cover one particular aspect of a job.
Cost-Plus (with or without guaranteed maximum)
In a cost-plus arrangement, the owner agrees to pay the contractor for the actual cost of work, plus a fixed fee or percentage of the overall costs. This way, the owner will not be paying for contingencies that were built in to the price but never used, as he or she would in a lump-sum contract. However, without a defined guaranteed maximum amount, there is little to no incentive for the contractor to keep his or her costs down. It is wise to include a guaranteed maximum price (GMP), which shifts the risk of additional, unexpected costs onto the contractor rather than the owner, which incentivises them to keep their costs down. GMP may also include provisions for sharing savings should the contractor complete the job for less than the expected costs.
If you are dealing with payment issues that have arisen from a real estate or construction dispute, or if you need help developing contracts for your jobs and deciding which form of payment to utilize, please contact the Florida Construction Law Group and let us work to protect your interests.