Construction Contracts and Billing Methods that every Contractor should know about

 In the world of construction, contracts play a very important role. In fact, a construction contract legally binds the owner and the builder/contractor with regard to the amount of remuneration that will be given.

The billing is then done based on the nature of the contract. While there are many kinds of construction contracts used and the corresponding billing types, some of them are used widely by professionals. Timer and Materials and Cost Plus contracts are used where there is great trust between the contractor and the client because each of these have the possibility for the contractor to overcharge.  Construction estimating software can that contains billing facility should be able to handle any of the following.

1) Fixed Price Contract

Fixed price billing is done for lump sum or fixed price contracts. As per these types of contracts, there is a fixed price for all the construction work done. There are incentives when the project is completed before time and at the same time penalties for late completion. Fixed price contracts are best suited for projects in which the scope is clear and the schedule is agreed upon by the contractor and property owner.

As a contractor, in a fixed price bill, one can charge the client a fixed price for the project and each invoice is a piece of the fixed price.

2) Unit Pricing Contracts

In a unit pricing contract,the client is billed based on the price per unit. Most builders charge their clients this way. It is easy for clients to ensure that they are being charged with un-inflated prices. The fact that the unit price can be tweaked with when there is a change in the scope of work. This helps the builder and client/owner communicate and reach a consensus when there is a change order.

3) Time and Materials Contract

In a time and materials contract, the contractor and client finalize the charges for labor and materials that will be needed for the project. The price for construction is not predetermined. The billing for the same is also done according to what the client and contractor decide on, i.e. an hourly or daily rate with additional expenses that will be involved in the construction. The contract will have the costs mentioned in it as direct, indirect, markup, and overhead.

The use of this contract type is made when the project schedule cannot be estimated or when there will be changes during the construction process. Such a contract poses least risk for a contractor because there is no boundary for the time taken to complete the project as well as for its cost.

4) Cost Plus Contract

In this type of a contract, there is thepayment of the actual costs and expenses incurred during construction. In the contract, a pre-decided amount is mentioned that covers the contractor’s overhead costs and profit. This contract comes in several variations.

This contract is best for projects where the scope is not defined in a clear manner and it is the client’s duty to place a limit on the contractor’s billing. This way the client/property owner will be financially benefitted as charges for unnecessary changes are avoided. However, it may be difficult to track this kind of a contract as needs more supervision.

Single invoice

Talking about invoices, the construction industry has single invoices. A single invoice is one invoice that is created to be sent out to one client.

Draw Schedule

For any construction project, a draw schedule is a well-detailed payment plan. Draw schedule has specified number of payments depending on the project size and what seems suitable to the contractorand the bank and/or client. This structure lends itself to the Fixed Price contract.

1.    In case the project is being financed by a bank, it is with the help of the draw schedule that the bank release funds to the owner and the contractor. Payments are to be made to the contractor as and when the work is completed. This works well in the financial angle as you need not pay beforehand for work that hasn’t been done or for building materials that have not been delivered.

It is usually in sync with the project’s milestones. For example, one payment can be made by the bank upon completing the foundation and another upon the completion of the next milestone.

2.    There is another way that contractors use a draw schedule when the bank is not involved. Each draw is made, at the completion of a milestone, to finance the contractor’s next phase of the project. In this schema the contractor and the client agree on the phases of the project and it is designed to give the client close control over their money while the contractor has money to purchase the materials and pay for labor to complete the phase. In this process it is incumbent on the contractor to explain each phase to the client in enough detail that there is no stress about the feeling of being taken.

AIA billing

AIA stands for the American Institute of Architects. The concept of AIA billing came into being in the year 1992. It creates a standard for contractors to follow when they submit their documents to architects. Some of the most commonly used AIA forms are G-702 contractor application for payment and the G-703 continuation sheet. On projects where an architect is involved the 2 forms are reviewed by architects and are duly signed by them. The methodology is designed to give incredibly detailed control of the project to the client as well as giving the contractor the same kind of control of the usage of funds.  According to it, the contractor can bill only the percentage that is completeof the total amount for each item in the project. It helps construction companies get an actual view of the financial status of the company in connection with the construction projects that have extended timelines. Commercial and large residential construction companies use the percentage of completion accounting method quite often. This structure lends itself to the Unit Price contract.

Handling the billing of change orders

A change order is an addition or deletion from contract’s original scope of work and as all the changes even this would incur a cost or extend the date of completion. The construction estimating software should have the capability to handle pricing and billing for whatever kind of change that occurs.