As a client, you need to be aware of the different types of contracts that a builder can use to construct your dream home. In this blog, we will discuss the different types of contracts that MDS Homes, a custom home builder in East Idaho, can offer to their clients.
What is a construction contract?
A construction contract is a legally binding agreement between a builder and a client that outlines the terms and conditions of a construction project. It is an essential document that protects both parties and sets out the expectations and responsibilities of each party.
Types of construction contracts
There are several types of construction contracts, and each has its own advantages and disadvantages. Let’s take a closer look at the most common types of construction contracts that MDS Homes offers to their clients.
Fixed-Price/Allowances
MDS Homes offers a fixed-price contract with allowances to provide their clients with additional flexibility. An allowance is a specific amount of money that is set aside for certain items in the construction project, such as cabinets or flooring. The client can use the allowance to select the materials or items they prefer, and any amount spent over the allowance is the responsibility of the client.
Advantages of a fixed-price contract with allowances:
· Flexibility: A fixed-price contract with allowances provides more flexibility than a traditional fixed-price contract. The client can use the allowance to select the materials or items they prefer, and any amount spent over the allowance is the responsibility of the client.
· Predictable cost: A fixed-price contract with allowances still provides a predictable cost for the construction project. The allowance provides a limit for certain items, and the fixed price covers all other costs.
· Transparency: A fixed-price contract with allowances provides transparency in the cost of the construction project. The client will have access to all the receipts and invoices related to the construction project.
Disadvantages of a fixed-price contract with allowances:
· Potentially higher cost: A fixed-price contract with allowances may have a higher cost than a traditional fixed-price contract because the allowance provides additional flexibility for the client.
· Limited flexibility: A fixed-price contract with allowances still limits the ability of the client to make changes to the construction project once the contract is signed.
Cost-plus contract
A cost-plus contract is a type of contract in which the builder charges the client for the actual cost of the construction plus a percentage of the total cost as a fee. This type of contract is also known as a cost-reimbursement contract.
Advantages of a cost-plus contract:
· Greater control: A cost-plus contract gives you more control over the construction project. You can make changes to the project as it progresses.
· Transparency: A cost-plus contract provides transparency in the cost of the construction project. You will have access to all the receipts and invoices related to the construction project.
· Potentially lower cost: A cost-plus contract may have a lower cost than a fixed-price contract because the builder only charges for the actual cost of the construction.
Disadvantages of a cost-plus contract:
· Uncertain cost: A cost-plus contract does not provide a fixed cost for the construction project. The final cost of the project may exceed your budget.
· Higher risk: With a cost-plus contract, the client bears the risk of cost overruns.
Time and materials contract
A time and materials contract is a type of contract in which the builder charges the client for the time spent on the construction project and the materials used. This type of contract is also known as a cost-plus-percentage contract.
Advantages of a time and materials contract:
· Greater control: A time and materials contract gives you more control over the construction project. You can make changes to the project as it progresses.
· Transparency: A time and materials contract provides transparency in the cost of the construction project. You will have access to all the receipts and invoices related to the construction project.
· Potentially lower cost: A time and materials contract may have a lower cost than a fixed-price contract because the builder only charges for the actual cost of the
Disadvantages of a time and materials contract:
· Uncertain cost: A time and materials contract does not provide a fixed cost for the construction project. The final cost of the project may exceed your budget.
· Higher risk: With a time and materials contract, the client bears the risk of cost overruns.
Guaranteed maximum price (GMP) contract
A guaranteed maximum price (GMP) contract is a type of contract in which the builder agrees to complete the construction project for a fixed maximum price. The builder is responsible for all the costs of the construction, but if the actual cost of the construction is less than the maximum price, the client will receive a refund for the difference.
Advantages of a GMP contract:
· Predictable cost: A GMP contract provides you with a predictable maximum cost for your construction project. You will know the maximum amount you need to pay for the construction of your dream home.
· Minimal risk: With a GMP contract, the builder is responsible for all the costs of the construction. This reduces the risk for the client.
· Flexibility: A GMP contract allows for changes to the construction project, but any changes may affect the final cost of the project.
Disadvantages of a GMP contract:
· Potentially higher cost: A GMP contract may have a higher cost than other types of contracts because the builder has to cover all the costs of the construction and may build in contingencies to ensure they don’t exceed the maximum price.
· Limited flexibility: A GMP contract may limit your ability to make changes to the construction project once the contract is signed.
Conclusion
Choosing the right type of contract is an important decision when building a custom home. MDS Homes offers several types of contracts to provide their clients with the flexibility and predictability they need. Whether you choose a fixed-price contract, a cost-plus contract, a time and materials contract, or a guaranteed maximum price contract, be sure to carefully review the terms and conditions of the contract before signing. And if you’re looking for a custom home builder in East Idaho, consider MDS Homes for your construction project.
