Basically there are four types of contracts used in the construction industry:
Based on their pricing arrangements are fixed price or lump-sum contracts, cost-type (including cost-plus) contracts, time-and-materials contracts, and unit-price contracts, which are defined in the FASB ASC glossary and further described as follows:
The four types are:
- A fixed price contract, also known as a lump-sum contract, provides for the contractor’s performance of all work to be performed under the contract for a stated price.
- A cost-type (including a cost-plus) contract provides for reimbursement of allowable or otherwise defined costs incurred plus a fee for the contractor’s services that represents profit.
- A time-and-materials contract is similar to a cost-plus contract and generally provides for payments to the contractor on the basis of direct labor hours at fixed hourly rates (the rates cover the costs of the indirect labor and indirect expenses and profit and cost of materials or other specified costs. This type of contract is usually the safest option for the contractor, but the riskiest for the owner.
- A unit price contract provides for the contractors performance of a specific project at a specified price per each unit of output. Unit price contracts are seldom used for an entire major construction project, but are frequently used for agreements with sub contractors.
What are the four types of contracts in construction?
Ref: AICPA Construction Contractors – Audit and Accounting Guide