What Homeowners Need to Know about Protecting Themselves Against Unscrupulous Contractors, Part II: Payment Contracts
In Part I of our series on protecting yourself against unscrupulous contractors, we discussed the licensing requirements required by Virginia law. In Part II, we’ll explore what you should know about the payment terms contract offered by a contractor.
Part II: Types of Contracts Based on Payment
Contracts include language that determines how payment should be determined and can be defined in the following ways:
Lump Sum/Stipulated Sum/Fixed Price Contracts
These contracts may go by different names, but in each, a single lump sum for all the work is agreed to before work begins. This is the most common type of construction contract. In it, the contractor must submit a total and global price, instead of bidding on individual items contained within the contract, based on his current knowledge of the project. It is generally used on projects where the risk of changing conditions is minimal. If an unforeseen contingency should arise, the contractor may return with a request, or change order, for additional payment to cover those costs.
A lump sum contract should be agreed to once all the work is well defined and you have reviewed all construction drawings. Once entered into, then it is up to the contractor to fulfill the terms of the contract, using his own methods and means, for the stated price.
- Fixed construction costs with higher risk to contractor and lower risk to homeowner
- Minimal change orders
- Often a faster completion; contractor maximizes production. (Some contractors may include a bonus for early completion.)
- Less homeowner supervision required than Time and Materials Contracts
Cost-Plus/Cost-Reimbursement/Unit Price Contracts
In cost-plus contracts, a contractor is reimbursed for all allowable expenses (up to a predetermined limit) plus additional payment to act as profit. Generally, costs for all materials, labor and overhead are added together, and a markup percentage is added on.
This type of contract may be also presented as a cost-plus-percentage, where the contractor bills for direct costs on labor and materials plus a percentage to cover overhead and profit, or a cost-plus-fixed fee, where the contractor bills for direct costs and a fixed fee for overhead and profit.
To protect themselves, homeowners should pre-determine a guaranteed maximum price. Homeowners can also negotiate to split any cost savings delivered by the contractor, or to provide an incentive bonus if the job is completed on time and on budget.
Choose a contractor based on experience, reputation, ability and proposed fee rather than bidding for a specific price. Ensure that the contractor clearly defines which items are considered direct/reimbursable costs.
Want Help Hiring a Contractor? Call Först Consulting Group
This information is for business purposes only and does not constitute legal, accounting or tax advice.