Whether building a new house or expanding a business, sometimes the easiest part of the construction is the actual physical labor. That’s because the volume of paperwork involved can be fairly hefty. No matter the project, every municipality requires filed agreements between the property owner and the contractor, as well as any engineers, architects, subcontractors, and suppliers involved.
Failure to properly file the contracts can result in headaches and legal problems for years to come. With this in mind, it’s best to make sure it’s all squared away before the first nail is driven.
This article will focus on the most common types of construction contracts required by New York state law. It will also look at some legal disputes that could arise during the construction process.
5 Common Types Of Construction Contracts
There are five basic types of construction contracts that are most often used when a building project is begun. They are:
- Lump-Sum or Fixed-Price Contracts
- Time and Materials Contracts
- Unit Pricing Contracts
- Cost-Plus Contracts
- Guaranteed Maximum Price Contracts
Each type of contract offers different avenues of payment and funding for builders, architects, subcontractors, suppliers, etc. They also map different time limits on construction and regulate just what can be done after construction begins.
Also known as fixed-price contracts, these contracts outline one fixed price for all work done under them. Because of their simplicity, lump-sum contracts are the most common type of construction contract. This makes them highly familiar to the average contractor.
Lump-sum contracts are best suited for smaller, predictable projects. While they simplify bidding and the selection process for both property owners and general contractors, they still leave little room for error. Naming a full price rather than submitting multiple bids can also lead to higher profit margins if the project finishes under budget.
In a lump-sum contract, every variable needs to be accounted for, and miscalculations can destroy margins. Because there’s one set price, setbacks due to weather or illness can cut into profits. Furthermore, there’s little room for change and the cost comes out of the original lump sum.
Lump-sum contracts may be the riskiest for profit margins because it’s difficult to fix mistakes or deal with unexpected costs that can arise after the project starts.
Time and Material Contracts
If the scope of the project is larger or less defined, a time and material (T&M) contract might be a better choice than a lump-sum agreement. Since contractors are reimbursed for the cost of materials as the project evolves, T&M contracts allow for more flexibility in the process. The contractor is usually paid an hourly or daily pay rate, as well as ongoing reimbursement for materials.
This arrangement allows the contractor to adjust for unexpected problems that might arise without going over budget and having to cut corners.
T&M contracts also make for straightforward negotiations when it comes to subjects like materials, labor pay, etc., as the project grows. On the other hand, tracking time and materials is very time-consuming, and discrepancies in noting materials or labor can cut into profits. Also, there’s no incentive to finish a project early.
The owner of the project takes considerable risks with a T&M contract. Any given construction project, large or small, will see many unpredictables. It generally falls to the property owner to cover unexpected costs, changes in design, or time overruns. Because of this, the project could wind up costing more than the property owner originally planned.
Unit Pricing Contracts
Also known as measurement contracts, measure and pay contracts, or remeasurement contracts, unit price contracts charge for individual estimates rather than an estimate for the project as a whole.
The contractor provides the owner with an estimate for each unit of work, such as foundation, wiring, insulation, etc. These contracts are useful for projects where the work is repetitive or heavily dependent on material costs. They also come in handy when the amount of work needed to finish the project isn’t clear beforehand.
Along with flexibility, unit price contracts make invoicing simpler, and their general structure allows for more transparency. Since the owner has a clearer understanding of how much work went into each unit, this helps avoid disputes when payment time comes. Furthermore, if more work is required, it doesn’t affect the profit margin. Extra work is simply another pre-priced unit, which makes changing orders or alterations less of a hassle.
However, problems can arise when it comes to predicting the final value of the contract. Any remeasurement – which happens when an owner reassesses an estimated cost or compares the price of each unit with the project’s total cost – can slow down total payment. The majority of the risk falls upon the property owner since unforeseen issues can require additional units.
Therefore, while the transparency afforded by unit pricing contracts can be beneficial, they can also sometimes be costly and time-consuming.
A cost-plus contract — sometimes referred to as a “cost-reimbursement contract” — is an arrangement that places the responsibility of covering ongoing costs upon the project owner. Whereas many other contracts require the contractor to either estimate their expenses up-front or request additional materials funds on a special-case basis, cost-plus contracts assume that ongoing cost expensing to the owner will be the norm.
Contractors will include a set amount of surcharge for their profit, which is often assessed using a percentage of the full project price.
Costs assessed within such a contract can include:
- Direct costs – Direct labor and materials
- Indirect costs – Office space, travel, and communication expenses
- Profit – The fee or markup previously agreed by the contract
Extremely malleable, cost-plus contracts allow for changes to be made to projects midway and they limit the amount of damage a miscalculation or incident can cause. Owners have the freedom to grow their project scope over time, and contractors know they’ll be paid for the extra labor and/or materials.
However, problems can arise when costs are explained or justified. The contractors must justify the cost on a given project, which can often be difficult to account for. The contractors are usually responsible for the initial costs of any material, which could put them in a bind if the costs are more than initially planned. Owners may also balk at having to reimburse any indirect costs that are harder to quantify.
One potential drawback to a cost-plus contract is that it could be seen as placing a lot of risk on the shoulders of the owner. They must cover any unanticipated costs, and they must be diligent about getting the contractor to enforce any expected cost-cutting measures.
On the other hand, some projects demand a flexible approach or inherently involve ongoing expenses that can’t reasonably be predicted. In these situations, a cost-plus contract can allow the contractor to make the most appropriate decision without feeling shackled by a pre-assigned budget or other constraints.
Guaranteed Maximum Price Contracts
Unlike the previous types of contracts, guaranteed maximum price (GMP) contracts shift a lot of risk to the contractor rather than the owner. GMP contracts establish a cap on the total price, and any excess material or labor must be covered by the contractor. Many times, other types of contracts will include a GMP provision to limit costs.
GMPs are common construction contracts because they offer predictable pricing, and they make contractors accountable for any cost overruns. Given their rigid structure, a GMP contract is typically chosen for a project that has a firmly established scope and few unknowns, such as for a big-chain retail business that uses the same plans for every new location. Having a final price accelerates the bidding process, making for quicker projects, and GMPs can incentivize savings.
Once a final price is set, the contractor is served best by staying under budget and finishing quickly. Predicting the cost of every single material can be difficult, so contractors will often invest in a best-of-breed cost-estimating application to help them accurately predict the final cost of a project in terms of materials, labor, and other costs.
Despite these advantages, negotiating a GMP contract can easily delay a project’s start. Since the contractor wants to be sure that they won’t be covering any unexpected costs, they will review the contract closely, and they may add a “buffer” for excess costs. This can lead to a lot of back-and-forth between the contractor and the owner before a project can begin.
Possible Legal Disputes in Common Types of Construction Contracts
When drafting a construction contract, it pays for both the owner and the contractor to keep the following things in mind to avoid any possible legal disputes. Deviations in contracts render them void and unenforceable.
- Governing Law – Section 757(1) of New York’s General Business Law requires that disputes must be resolved by New York state law, except in the case where the contract is with a material supplier.
- Forum Selection – Like with Governing Law, any disputes that involve litigation, arbitration, or other resolutions arising from the contract must take place in New York state.
- Suspension of Work – Under Section 757(2), provisions that prohibit the suspension of work under a private contract for nonpayment. A contract can’t contain a provision that the party under contract cannot suspend performance if the other party fails to make prompt payment.
- Periodic Payments – Under Section 756-b(3), parties under the contract can’t avoid expedited and binding arbitration of disputes over nonpayment or late payment. Payments also must be made promptly, usually within 30 days of the project’s completion.
- Retainage – The parties can’t agree to retain greater than five percent of payment bond or no more than ten percent when no bonds are required. This would put conditions on a subcontractor’s or supplier’s right to pursue payment.
- Indemnification – Owners, contractors, subcontractors, architects, and engineers are prohibited from passing along the risk due to their negligence to other parties.
- Mechanic’s Lien Rights – Under Section 34 of the New York Lien Law, any contractual language that attempts to limit or eliminate a contractor’s lien rights are void and unenforceable. This means the materials or properties are under the jurisdiction of the contractor until such time the project is finished and responsibility is passed on.
- Pay-When-Paid – Making the subcontractor’s payment contingent on the general contractor’s payment interferes with the subcontractor’s aforementioned right to enforce a mechanic’s lien.
Even the Best-Laid Plans Can Go Awry – Talk to a Construction Accident Lawyer in New York
Because of all the legal details involved in contracts, completing a project is clearly not as simple as having a good plan and willing workers. Putting up a construction project, either as an owner or a contractor, is very complicated under New York law. Complications can also arise when you or someone on your crew is hurt, and liability may extend beyond typical workers’ compensation agreements.
To help navigate the rules and regulations, give The Weinstein Group, PLLC a call. Let us help you determine how contracts and New York tort laws could affect your ability to claim compensation for a construction injury. Our New York construction accident lawyers have decades of experience assisting injury victims and helping them pursue the maximum amount of compensation from all liable parties.
We have the know-how to help you make recovering from injuries a less-stressful part of the job. Call us today at 212-741-3800 or contact us online to schedule a free, no-obligation case review with an experienced New York injury attorney near you.