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August 17, 2023

Table of Contents:

1. Lump Sum or Fixed Price Construction Contracts 
2. Cost Plus Contracts: Flexibility and Risk 
3. Guaranteed Maximum Price (GMP) Contracts 
4. Choosing the Right Contract for Your Residential Project 
5. AIA Contract Documents: Essential Resources for Home Builders 

Introduction 

Residential construction is both lucrative and complex, with various factors influencing the success of a project. One of the most important decisions you’ll make is choosing the right construction contract. The type of contract you select will impact the risk management, cost structure, and overall schedule of your project. Understanding the different types of contracts available and selecting the right one will ensure a smoother process and more predictable outcomes. Below, we explain the most common contract types used in residential construction. 

1. Lump Sum or Fixed Price Construction Contracts

What is a Lump Sum Contract?

In a Lump Sum (or Fixed Price) contract, the contractor agrees to complete the entire project for a set price. This is a straightforward contract option that works best for projects with clear, well-defined scope, schedule, and expectations. It’s an ideal choice when the project is predictable and the contractor has experience in the type of work required. 

Benefits of Lump Sum Contracts:

• Both the homeowner and contractor have a clear understanding of the project’s costs and schedule. 
• Progress payments are made on a set schedule, which helps the contractor manage cash flow more efficiently. 
• Contractors may receive incentives for completing the project early. 

However, lump sum contracts have limited flexibility. If the project scope changes or unforeseen issues arise, the contractor is responsible for absorbing the additional costs unless they’re covered by a formal change order. 

2. Cost Plus Contracts: Flexibility and Risk

What is a Cost Plus Contract?

In a Cost Plus contract, the contractor is reimbursed for all project expenses (materials, labor, etc.), plus a fee for project management services. This fee is often calculated as a percentage of the total building costs. Cost Plus contracts offer more flexibility, as construction can begin even if the full scope isn’t completely defined. 

Advantages of Cost Plus Contracts:

• Flexibility: Easier to make changes or substitutions throughout the construction process. 
• Risk Reduction: Contractors are reimbursed for all expenses, so there is less risk of going over budget. 
• Clear Profit Margin: The contractor understands their profit margin upfront based on the building cost percentage. 

While these contracts reduce financial risk for the contractor, the project owner may face unpredictable costs as the project progresses. 

3. Guaranteed Maximum Price (GMP) Contracts

What is a GMP Contract?

A Guaranteed Maximum Price (GMP) contract combines elements from both Lump Sum and Cost Plus contracts. It includes a cap on the total project cost, beyond which the contractor absorbs any additional expenses. The project is completed for a fixed price, but if the costs exceed the agreed-upon maximum, the contractor is responsible for covering the overages. 

Benefits of GMP Contracts:

• Cost Control: Homeowners know the total maximum price they will pay, offering more financial predictability. 
• Shared Risk: The contractor takes on some of the financial risk if the project exceeds the maximum price. 
• Transparency: Both parties have a clear understanding of the financial limits, helping to mitigate the risk of cost overruns. 

GMP contracts offer a balance of flexibility and cost certainty, making them a good option for projects with some level of unpredictability but still requiring cost control. 

4. Choosing the Right Contract for Your Residential Project

Which Contract is Best for My Project?

Choosing the right contract depends on various factors, including the scope, complexity, and flexibility required for your project. Here are some questions to help guide your decision: 

• Is the project scope clearly defined?
• How much flexibility do you want regarding the project schedule and costs?
• How much risk are you willing to assume as a homeowner or contractor?
• How should unforeseen changes or events be managed financially?

Understanding these factors will help you select the best contract type for your needs. It’s essential to weigh the benefits and drawbacks of each option and choose a contract that aligns with your goals and preferences. 

5. AIA Contract Documents: Essential Resources for Home Builders

The American Institute of Architects (AIA) has developed several essential contract documents to help residential builders navigate the complexities of construction agreements. Some of the latest AIA documents include: 

• A111™–2021: Standard Form of Agreement Between Owner and Home Builder for Construction of a Single Family Home. 
• A112™–2021: Standard Form of Agreement Between Owner and Home Builder for Design and Construction of a Single Family Home. 
• A113-2022: Standard Form of Agreement Between Owner and Contractor for Remodel of a Single Family Home. This is a must-have for residential remodelers and addresses the unique aspects of home remodeling projects. 

These documents provide clear guidelines that help home builders and homeowners understand their roles and expectations throughout the project, reducing the risk of misunderstandings or disputes. 

Additional Resources for Home Builders:

• Three Risk Management Strategies Every Home Builder Should Know 
• 3 Key Contractual Provisions for a Successful Residential Project 
• New Industry Standard Contracts for Home Builders – Watch On Demand 
• Important Legal Considerations for Home Builders – Watch On Demand 
• Complete Guide to Preparing Home Builder Agreements – Watch On Demand 

Conclusion

Choosing the right construction contract is critical to the success of any residential project. Whether you’re opting for a Lump Sum, Cost Plus, or Guaranteed Maximum Price contract, it’s important to understand the structure and risks involved. By evaluating your project’s scope, flexibility needs, and financial goals, you can select the contract that best aligns with your objectives. Don’t forget to explore the resources provided by AIA Contract Documents to help streamline your home building or remodeling process. 

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.