Navigating Different Types of Contracts

Navigating Different Types of Contracts

by Mariann Gerwig, GC, HI, CAM / Published November 2014


Any type of contract can be a bit daunting to understand. However, if you happen to be a board member, you must not only understand it, but you must be able to explain the contract terms to the members. You should always have your lawyer look over a contract before you sign it, but you still need be able to understand it. For example, in construction, for years the standard contract has been the AIA (American Institute of Architects) contract form. It is a bit hard to understand and not necessarily tailored to the type of work that you may have being performed. So the legal fees involved in making it conform could be very high.

Most contracts only need to contain three elements to be legally valid:

• An offer has been made by one party and accepted by another party.

• All parties must be in agreement to the terms in the contract.

• Something of value must be exchanged for something else of value.

The most common types of contracts are:

Fee for Service—This kind of contract is normally—but not limited to—used in situations where you engage a vendor to perform ongoing services, such as pest control, pool maintenance, landscaping, and professional fees. It usually consists of a list of services offered and the related prices. When the service is performed, the fee is due. You could also include in this contract a schedule of when services will be done (for example, pool to be cleaned every Monday and Friday). 

Your list of services included in the contract would have the fee if you needed an additional cleaning one week.

Lump Sum Contract—This kind of contract is explicit that a specific task will be done for a specific amount of money. For example, if you were building a home, you would have a detailed scope of the work that is to be done for a set amount of money. Normally, there is always some type of change to this type of contract. When there is any change to the original scope of work, a change order is issued that states the change and the fee for that change.

Cost-Plus Agreement—This type of contract is not seen as often as it once was 10 or 15 years ago. The two parties basically agree to a percentage of profit that the provider will be allowed to charge in order to complete the scope of work. You are agreeing to pay all expenses plus a percentage to the provider. Even though this appears to be a fair agreement because the providers profit was a stated amount, it turned out that it had many pitfalls. If we use building a home once again as an example, keep in mind that the amount of money the contractor makes is based on their cost to build the home. So they would have no incentive to shop around and save money. Billing for these contracts would have to include proof of the expense they were claiming with a summary of the cost of the expenses with the profit markup. A representative for the homeowner would have to go over all the bills to make sure that all of the costs presented were valid.

Time and Materials Agreement—An agreement is reached on how much per man-hour you will pay for a service. Material will be charged at cost plus an agreed percentage to cover overhead. It may sound like this is similar to the Cost-Plus Agreement and in some ways it is. However, this type of contract is normally used when the amount of work is not clear. If a defined scope of work cannot be supplied to the provider, it is impossible for them to give you a lump sum price. These are commonly used for small jobs and seem to be fair to both parties.

Unit Price Contract—This contract, which is the standard in restoration work, gives a price per unit of work done. There is normally an estimate of the quantities and therefore an estimated contract amount. Each billing period the quantities of each unit are verified and billed at the agreed on unit price. The scope of work in this type of contract is stated but rather vague because the extent of the work is unknown. Normally, there is a third party that controls the work that is performed and monitors the quality of the work. Again, in restoration work, there would be an engineer hired by the association that directs the contractor where to perform their repairs, monitors quality, and verifies that they are only paid for the repairs they were directed to perform.

There are certain things that should be in all contracts to avoid problems in the future.

When the work is expected to begin and how long it will take to complete the work. What are the avenues of recourse if those time frames are not met?

Payment terms—Agree to the frequency of payments and the amount of days to remit payment after you receive the bill. What are the repercussions for late or non-payment? Keep in mind that if you do find yourself unable to make a payment on time, you are always better off calling the other party and discussing possible arrangements. This could avoid additional fees as well as legal fees.

Dispute Resolution—The truth of the matter is that contracts are in existence because a dispute may arise. An arbitration clause, which simply put means you talk things out with an uninvolved, third party to mediate, is far less costly than court and offers a less formal environment.

Legal Fees—Determine who will be charged for the attorney’s fees if there is a breach of contract.

Warranty—Make sure that warranties are stated in the contract, and when the work is done, you receive all warranties expected.

Releases of Liens—If you have received any Notice To Owners from suppliers, make sure the provider gives you Final Release of Liens from them as well as one from the provider.

As you can see, there are many types of contracts as well as many parts to a contract. This is why I stress that if it is written in laymen’s language and not in legal terms, you will have a better understanding of what you are entering into. Template form contracts may appear to be a cost saver because you do not have to have an attorney write an individualized contract that covers all the pertinent points. However, commonly the provider already has a user-friendly contract and all you have to do is have your attorney review it and negotiate the parts that they feel are not in your best interest. 

And finally, make sure there is no small print and if there is, get out your magnifying glass. Chances are it is small for a reason and it is not to save paper.