Beginner Series - Negotiating Construction Contracts

The Real Estate Espresso Podcast

On today’s show we are breaking down the different types of construction contracts that you can sign. Now let me be clear, I’m not here to offer any type of legal advice. I’m merely sharing our experience when it comes to undertaking different types of construction projects.

The first thing you need to get clear on is whether you are hiring a general contractor or a construction manager. This is a distinct choice. In either case, there will be subcontractors involved for the specific work items. You might have different subs for framing, mechanical electrical, plumbing, concrete, finishing and so on. There could be up to 20 distinct subcontractors on a typical build project. The main distinction between the general contractor and the construction manager is who hires the subcontractors? You might hire the subcontractors directly and pay them directly. The subs work under the direction of the construction manager. The bids, the schedule, and all of the practical elements of the project are handled by the construction manager. But the contractural relationship is different. There is no markup being charged on the subcontractor’s work. You pay the construction manager a fixed fee.

Let’s assume that you decide you want to hire a general contractor and you are going to pay only the general contractor. The GC is responsible for all aspects of the project.

In construction projects, the contract type is crucial for defining cost control, risk allocation, and payment structures. Here’s a comparison of the three main types:

1) Cost Plus

2) Lump Sum (Fixed Price)

3) Guaranteed Maximum Price

The biggest item to figure out with each of these models is who is going to carry the contingency fund. There is always going to be some variability in construction. The question is who is going to carry that risk and where is the money going to come from to pay for those costs if and when they do arise.

Whichever model you choose, there are pros and cons. Whatever you do, make sure you hire a lawyer who specializes in construction contracts. This is an area of specialty in the law just like real estate .

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