Michigan Residential Builders License Practice Test

What is the most common type of contract used in residential construction?

1. Cost-plus contract

2. Fixed-price contract

3. Time and materials contract

4. Lump sum contract

The correct answer is: Lump sum contract

The lump sum contract is the most common type of contract used in residential construction because it provides a clear, fixed price for the entire project before the work begins. This structure is appealing to both builders and homeowners, as it establishes a defined budget and scope. Homeowners appreciate the predictability of costs, which helps them financially plan for the project without the worry of price fluctuations. On the other hand, builders benefit from the efficiency associated with lump sum contracts. They can better manage their resources and emphasize completion within the agreed-upon budget. This type of contract typically details the specifications of the work to be performed and outlines the timeline, creating a straightforward agreement that sets clear expectations for both parties. In contrast, other types of contracts, such as cost-plus or time and materials contracts, can lead to variable costs as the project progresses, which might present budgeting challenges. In more complex projects, while these contracts can offer flexibility, they are less common in standard residential construction, where simplicity and predictability are paramount.