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How can you choose the right contract type for a land development project?

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Choosing the right contract type for a land development project is a crucial decision that can affect the cost, quality, risk, and timeline of the project. Different contract types have different advantages and disadvantages depending on the scope, complexity, and uncertainty of the project. In this article, you will learn about the main types of contracts used in land development projects and how to select the best one for your project goals and needs.

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Jorge Pairazaman C

MBA Project Manager / Ing. Civil

1 Fixed-price contracts

Fixed-price contracts are contracts where the contractor agrees to deliver the project for a fixed sum of money, regardless of the actual costs incurred. This type of contract is suitable for projects that have a clear and well-defined scope, specifications, and schedule. Fixed-price contracts can provide certainty and stability for both the owner and the contractor, as well as incentivize the contractor to complete the project efficiently and within budget. However, fixed-price contracts also have some drawbacks, such as the difficulty of making changes or adjustments during the project, the potential for disputes over scope or quality, and the risk of underestimating or overestimating the project costs.

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Fayaz Ahmad Qasim Jan (Golden Visa holder)

Senior Infrastructure Manager - Experience in Infrastructure Delivery and Operation Dubai UAE
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To choose the right contract type, you should first define the project scope and specifications and identify any sources of uncertainty or variability.

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Tarek Fahmy

Senior Construction Manager , PMP?PMC | PDS | PMO | Buildings | Smart Cities | Construction Manager | GCC | Highrise | Project Manager | Resident Engineer | Client Rep. | Director
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Lump sum : Parties agree on a fixed price for the entire project or phase. Best for projects with a well-defined scope of work. Time and materials : Contractors bill for all material costs and labor at an hourly rate. Helpful for projects with uncertain scope. Unit price : Work is divided into fixed cost units, and contractors bill for each unit separately. Useful for projects with an uncertain number of repeatable elements.

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Jorge Pairazaman C

MBA Project Manager / Ing. Civil
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Suma alzada: la cual se traza un precio fijo para todo el proyecto. Hay que tener en cuenta que esta modalidad de contrato, el riesgo lo asume en su totalidad el Contratista y no el cliente, además, si nace un cambio en el alcance del proyecto puede dar lugar a disputas sobre el costo adicional.

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2 Cost-plus contracts

Cost-plus contracts are contracts where the contractor is reimbursed for the actual costs of the project, plus a fee or a percentage of the costs as profit. This type of contract is suitable for projects that have a high degree of uncertainty, complexity, or variability in the scope, specifications, or schedule. Cost-plus contracts can provide flexibility and adaptability for both the owner and the contractor, as well as allow the contractor to cover the risks and contingencies of the project. However, cost-plus contracts also have some drawbacks, such as the lack of cost control and accountability for the contractor, the difficulty of monitoring and verifying the costs, and the risk of cost overruns or inefficiencies.

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Jorge Pairazaman C

MBA Project Manager / Ing. Civil
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Es esencial establecer mecanismos sólidos de control, monitoreo y rendición de cuentas para mitigar los riesgos asociados con la falta de límites presupuestarios. En última instancia, la elección de este tipo de contrato debe basarse en una evaluación cuidadosa de las características del proyecto y la relación de confianza entre las partes involucradas

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3 Unit-price contracts

Unit-price contracts are contracts where the contractor is paid for the quantity of work performed or materials supplied, based on a predetermined unit price for each item or activity. This type of contract is suitable for projects that have a repetitive or standardized scope, specifications, or schedule, such as earthwork, paving, or utilities. Unit-price contracts can provide transparency and simplicity for both the owner and the contractor, as well as allow the contractor to adjust the work volume according to the actual site conditions. However, unit-price contracts also have some drawbacks, such as the uncertainty of the total project cost, the possibility of quantity variations or discrepancies, and the risk of quality compromise or disputes.

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Jorge Pairazaman C

MBA Project Manager / Ing. Civil
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En proyectos inmobiliarios, los contratos a precio fijo ofrecen la estabilidad necesaria al establecer costos predefinidos para actividades específicas. Este enfoque brinda seguridad financiera al propietario al conocer el costo total desde el principio. Sin embargo, la clave radica en una planificación detallada y la claridad en los requisitos para evitar posibles contingencias. La rigidez de los precios fijos puede presentar desafíos en proyectos propensos a cambios, requiriendo una gestión ágil y comunicación constante. La transparencia en la definición del alcance y la colaboración estrecha entre todas las partes son fundamentales para el éxito de este tipo de contratos en el dinámico mundo de los proyectos inmobiliarios

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4 Hybrid contracts

Hybrid contracts are contracts that combine elements of different contract types, such as fixed-price and cost-plus, or fixed-price and unit-price. This type of contract is suitable for projects that have a mixed or diverse scope, specifications, or schedule, such as a land development project that includes design, construction, and maintenance phases. Hybrid contracts can provide balance and customization for both the owner and the contractor, as well as allow the contractor to allocate the risks and rewards of different aspects of the project. However, hybrid contracts also have some drawbacks, such as the complexity and ambiguity of the contract terms, the difficulty of coordinating and integrating different contract components, and the risk of conflicts or misunderstandings.

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Jorge Pairazaman C

MBA Project Manager / Ing. Civil
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un aporte que puedo contribuir es la ejecución de un complejo residencial con un contrato a precio fijo. Surgieron desafíos inesperados relacionados con la calidad del suelo, lo que requirió ajustes en la cimentación. Optamos por un enfoque de coste plus para esa parte específica, demostrando la flexibilidad de un contrato híbrido. La clave fue una comunicación abierta y reuniones frecuentes para adaptarnos eficientemente a las condiciones cambiantes, resaltando la importancia de la flexibilidad y una gestión proactiva en proyectos inmobiliarios.

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5 How to choose the right contract type

When selecting a contract type for a land development project, there is no one-size-fits-all solution. The best contract type depends on various factors, such as the project objectives, scope, budget, schedule, quality, risk, and relationship between the owner and the contractor. To choose the right contract type, you should first clearly define the project scope and specifications and identify any sources of uncertainty or variability. Assess the project risks and opportunities to determine how to allocate and mitigate them between the owner and the contractor. Evaluate the project cost and schedule to establish the level of control and accountability for both parties. Compare the pros and cons of different contract types while considering trade-offs between certainty and flexibility, stability and adaptability, simplicity and complexity, and transparency and ambiguity. Negotiate the contract terms with the contractor so that they reflect the project goals as well as both parties' expectations and responsibilities. Ultimately, selecting an appropriate contract type for a land development project can help you achieve a successful outcome.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Joseph G.

Manager specializing in Building/Construction Finishing at Concretewhisperer
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Setting dates and timelines in contract, and staying on schedule helps give customers a piece of mind. Keeps contractors and customer relationship flow smoothly with little conflicts and gives contractor good positive feed back from customers on reviews towards business.

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How can you choose the right contract type for a land development project?

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1 Fixed-price contracts

2 Cost-plus contracts

3 Unit-price contracts

4 Hybrid contracts

5 How to choose the right contract type

6 Here’s what else to consider

Construction Management

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