Contracts used in the Construction Industry

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

Author: Terry Kelley MBA

Controller in the Construction industry. Over the past 30 years I have worked as an electrician (studied 3 years at CCVTC -for Electrical) for 6 years. I've owned my own construction company for over 15 years (where I wore many hats) to include accounting and finance. And, for the remainder of my career I have and still are working as a Controller in the Construction Industry. I have earned my Bachelors degree and MBA in accounting. Now, I am working to earn my CCIFP certification. I have put together this study group in hopes of working together with other CCIFP candidates. View all posts by Terry Kelley MBA