A Construction Contract is an agreement between a client and a contractor that specifies the details of a construction project. The details in a construction contract should include all aspects of the project, including payment, the type of work being done, the legal rights of the contractor, and more.
For some construction projects, you may need government permits and a Construction Contract Agreement before contractors can begin working.
What is a Construction Agreement?
A Construction Contract Agreement is a written document between a property owner and a general contractor specifying the construction, renovations, alterations, or other work on the property owner’s home or land.
This document outlines which parties will be engaged, the price to be paid, the rights of each party, and the date construction will commence and be completed.
A simple document will identify the following essential elements:
- Owner: The party hiring the general contractor to complete construction on their property.
- General contractor: The party responsible for the day-to-day construction oversight.
- License number: The general contractor’s state license board number, proving they are a licensed contractor
- Worksite: The property address where the construction is to be completed.
- Description of work: A detailed description of the work and construction to be done by the contractor. You can also attach project plans and specifications to the agreement.
- Contract price and payments: The total cost for the work and how and when payments will be made.
- Contract documents: any drawings, blueprints, exhibits, or other documents that will be part of the contract
- Materials and labor: Which party will supply and pay for the cost of materials and labor
- Starting and completion dates: The contractor must start construction and have the construction substantially completed.
- Licensing and permits: Which party will be responsible for obtaining any required licenses and permits
- Subcontracts: Whether the contractor will hire subcontractors to help perform part of the contractor’s obligations
- Work changes: Any changes to the agreed-upon work will be handled once construction begins.
- Warranties: How long will the contractor warrant that their work is free from material defects.
These additional elements can also be included:
- Indemnification: The contractor promises to be responsible for any loss or damages incurred by the owner arising from their work.
- Dispute resolution: Arbitration, mediation, and adjudication are common ways for parties to settle disputes under the contract instead of going through the courts.
- Termination: When the buyer or contractor can terminate the contract.
- Inspection: This allows the owner to examine the work done by the contractor at any time during construction to see if it conforms with the contract terms.
- Insurance: Owners and contractors are responsible for obtaining insurance to protect against damages, defects, claims, and losses.
- Liquidated damages: An amount per day that the contractor must pay the owner for each day past the agreed-upon completion date that construction is delayed.
- Force majeure: Parties will not be responsible for non-performance due to unavoidable occurrences or circumstances beyond their control (e.g., hurricanes, earthquakes, shortage of materials, change in contract plans).
In addition, you can also specify how the worksite should be maintained, including supervision of the workers, storage of materials, and where waste can be dumped.
A Construction Contract Agreement may also be called:
- Construction Agreement
- Construction Contract
- Construction Management Agreement
- Service Agreement for Construction
- Construction Services Contract
- Contract for Construction
- Construction Contractor Agreement
- Contractor Agreement
Common issues solved by a construction contract
| Owner | Contractor |
|---|---|
| Commencement and completion delays | Payment delays |
| Imbalanced risk allocation | Imbalanced risk allocation |
| Poor performance | Additional labor costs |
| Unsatisfactory or wrong work | Additional material costs |
| Work changes | Work changes |
| Loss of use of home | Lost profits |
| Early termination | Early termination |
When Do You Need a Construction Contract?
You should use a Construction Contract Agreement if you are on either end of the building, renovating or altering a building or structure.
This agreement allows both parties to write the details of the work to be performed and the responsibilities of each party throughout construction. In addition, it also details the payment terms of the project. In general, there are three different types of pricing arrangements:
Lump-sum: Also known as the traditional “fixed price” contract, it is the most common pricing arrangement for construction contracts. In a lump sum contract, the parties agree on a fixed price based on the contractor’s appraisal of complete and final design costs. Lump-sum contracts consider all materials, subcontracts, labor, indirect costs, profit, etc.
Cost or cost-plus: In a cost-plus contract, the owner reimburses the contractor for all expenses incurred during the construction, such as materials and labor. The owner also pays an agreed-upon profit margin, usually a flat fee or percentage of total costs.
Unit price: A unit price arrangement involves the parties placing a price on every unit or relevant piece of work, such as, by item, by cubic yard, by linear foot, or per hour.
| Pricing Arrangements | Pros | Cons |
|---|---|---|
| Lump Sum | • The contractor can ask for a higher markup in anticipation of unforeseen events. • The contractor can have a larger profit if they overestimate the total cost. | • The contractor bears almost all of the financial risk. • The contractor's underestimation of the total costs will lower their profit. • If the contractor overestimates, they may have difficulty in being the lowest bidder for the contract. |
| Cost-Plus | • It results in an accurate accounting of overhead costs and general conditions. • It's useful when there is variability in the amount of materials or time. | • Costs can rise rapidly. • The owner must verify hundreds or thousands of claimed costs. • The owner may be more susceptible to a dishonest contractor or fraud. |
| Time and Materials | • It allows work to start quickly. • It provides clear documentation of associated costs. | • The client bears the risk of exceeding their budget. • The contractor may take more time to complete their work to receive more pay. |
| Unit Price | • It provides straightforward pricing per unit of work. • It's simple to manage scope changes. | • The final cost is unknown until the project finishes. • It creates an unbalanced bid due to the contractor's ability to raise and lower certain item prices. |
The construction process also involves many moving parts, and clearly defining which party is responsible for what role allows the method to go more smoothly. A few of the necessary details that can be expressly assigned to either party include:
- Obtaining permits – new construction and additions to existing buildings often require approval by the local authority and obtain a permit.
- Providing construction materials, including cement, drywall, wood floors, or paint.
- Buying fixtures – remodeling and construction often involve new fixtures such as a stainless steel stove, Sub-Zero refrigerator, or fancy new chandelier.
- Paying for utilities – sometimes temporary utilities such as generator power, drinking water, and sewage are needed for construction.
The Consequences of Not Using a Construction Contract
Say your contractor and his team suddenly stopped working, demanding excessive payment for materials and labor not originally agreed upon.
Or your client, the owner, refuses to pay you after completing the project. Either way, you’ll want to ensure you have an agreement in writing to protect your rights.
If you don’t have an agreement, you risk wasting time and money, not to mention the quality of the construction.
The success of construction depends on clearly defined expectations and schedules. Mistakes or delays affect both owners and contractors negatively, causing owners additional costs because they cannot use the property for the intended purpose at the planned time and causing contractors additional costs for labor and equipment.
Owners can protect against delays in construction with a liquidated damages clause in their agreement. Rather than litigating damages in court, the owner and the contractor can agree on a liquidated damages amount in advance.
Liquidated damages are a set amount per day that the contractor will pay the owner each day that construction is delayed.
Here are some common causes of construction delays:
- Adverse weather
- Material shortages
- Changes in design
- Restrictive regulations
- Transportation delays
- Delays in obtaining permits
- Labor strikes
Including a liquidated damages clause is not without risks. The amount agreed upon may not cover the damages the owner suffered. Or it may be greater than the amount a court would have ordered.
The liquidated damages clause can assure the owner that they will recover some amount for the delay in construction, and the contractor can limit their exposure.
