Classification of Contracts. There are three main classes of contracts for building construc tion in general use to-day. They are as follows: (1) The lump sum contract, where the contractor receives a certain amount of money for completing the work delivered in place.
(2) The unit-price contract, where the contractor receives so much money per thousand brick, per cubic yard of concrete, per pound of steel, etc.
(3) The cost plus compensation contract, which means that the owner advances the money, and the con tractor supplies the managerial skill and organization.
These different kinds of contract, and all their complications, may be subject to a large number of various modifying clauses and re strictions on both sides; but in general almost any contract in use to-day for building con struction in the United States may be classified under one or other of the above headings.
Essentials to the Contractor. Before taking up the classes and general structure of the con tract in detail, it is important to consider the general features of the contract in their economic bearing. For this purpose we shall consider that there are two principal parties in interest, one of whom does the work—whom we shall call the contractor, and ordinarily designate as the party of the first part; and the other party, the owner, who advances the money and is to obtain possession of the completed work, and who is frequently designated the party of the second part.
From an economic standpoint, the essentials that the contractor requires, in order that the matter may be a satisfactory business venture for him, are as follows: (a) Pay, regular and sufficient.
(b) Freedom from interference with the economic conduct of the work.
(c) Special privileges.
These we shall here discuss in this order.
(a) Pay. A contractor in all forms of con tracts except the third class indicated above (cost plus compensation), requires capital in order to pay his men, to pay for materials and supplies, and to support himself while the work is in progress and before he receives his money from the owner; but the amount of capital that he actually needs is by no means as great as the total cost of the work when completed. If the amount of work that a contractor has on hand, when ultimately completed, will cost $100,000, the amount of money that the contractor himself must have in the business may often be as low as $5,000, and is seldom higher than $15,000 or $20,000.
To understand this, let us see how the work actually proceeds. Upon completing the agree ment, the contractor engages men to work for him, and he wants materials. The materials are ordered from the manufacturer or jobber upon an understanding whereby the contractor is to pay for them, let us say, 30 days after delivery upon the work; and the workmen are to receive their pay at the end of each week or month.
Thus the contractor will not have to pay out anything in actual cash, except what might be called "petty cash items," until the first pay day. On the first pay-day he will have to pay for the labor to date. At the end of the month the materials and supplies that were delivered when he first commenced operations will have to be paid for, but not material that has been delivered during the first month; therefore the actual work done to date, by the end of the month will represent a considerably larger amount of money than the contractor has had occasion to pay out for labor and materials, although the contractor is obliged ultimately to pay for these materials and labor from time to time as the payments become due.
Now, in the majority of contracts it is stipu lated that the owner shall place with the con tractor from time to time—usually from month to month—certain installments of the contract price, which installments will be as nearly as possible proportionate to the value of the work that the contractor has done, less a percentage (usually figured at 10 per cent or so) which is held up in order that the contractor may not be financially at liberty to stop the work and seek other employment to the detriment of the par ticular work covered by the contract in question.
It is evident that if the installments of the contractor's pay are not forthcoming when they are due, the contractor will not receive enough money to meet the payments that he has obli gated himself to make for labor and materials; and conversely, it is clear that if the payments are made by the owner with proper regularity and are sufficient in amount to cover the con tractor's expenses and obligations as they be come due, he (the contractor) will not be obliged to furnish money to "carry on the job." When work has been badly laid out in the beginning, so that through a mistake or otherwise the con tractor is obligated for amounts in large excess of what he is obliged to pay out, the carrying charges may be very large; and if he is swinging a million dollars' worth of business on $100,000 capital, he may find himself at a comparatively early stage of the proceedings with most or all of his capital "tied up," and may be obliged to borrow more money at high rates of interest. He will therefore not only be losing interest on the money that he has himself invested in the business, but also be paying an additional inter est on the money borrowed. When it is appre ciated that this interest may easily be 6 or more per cent on the loan, and that his profits, which are his compensation for his own services, may not be more than 10 or 15 per cent on the con tract price, it seems clear that insufficient and irregular payments are to be very carefully avoided.