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, legal rights of the contractor, and more.
For some types of construction projects, you may need government permits in addition to the construction contract before contractors can begin working.
1. 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 to be done 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 basic elements:
- Owner: The party hiring the general contractor to complete construction on his or her property.
- General contractor: The party responsible for the day-to-day oversight of the construction.
- License number: The general contractor’s state license board number, proving they are a licensed contractor
- Worksite: The address of the property 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 price to be paid for the work and how and when payments will be made.
- Contract documents: any drawings, blueprints, exhibits or other documents that will 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 dates the contractor must start construction and have the construction substantially completed by.
- 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: How any changes to the agreed upon work will be handled once construction has begun.
- Warranties: How long will the contractor warrant that his or her 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 out of his or her 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: 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 both responsible for obtaining insurance to protect against damages and defects, and claims and losses.
- Liquidated damages: An amount per day that the contractor must pay to 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
2. When Do You Need a Construction Contract?
You should use a Construction Contract Agreement if you are on either end of the process of building, renovating or altering a building or structure. Perhaps you’ve finally decided to build your dream home and start living happily ever after. Happily ever after might have to wait because of unreasonable contractor delays or unexpected, excessively high costs.
Or maybe you are a local contractor looking to grow your business and take on bigger construction projects. Either way, you’ll want to make sure you have an agreement in writing to act as the blueprint until construction is completed to iron out the wrinkles.
This agreement allows the parties to put into writing the exact nature and details of the work to be performed, and the responsibilities of each party throughout the course of 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 costs of a complete and final design. Lump sum contracts take into consideration all materials, subcontracts, labor, indirect costs, profit, and more.
Cost or cost-plus: In a cost-plus contract, the owner reimburses the contractor for all costs 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.
|Lump Sum||-Contractor is able to ask for a higher markup in anticipation of unforeseen events|
-Contractor has larger profit if overestimates total cost
|-Contractor bears almost all of the financial risk
-Contractor’s underestimation of total costs will lower profit
-An overestimate may lower chances of being lowest bidder for the contract
|Cost/Cost-Plus||-Accurate accounting of overhead costs and general conditions|
-Used when there is variability in amount of materials or time
|-Costs can rise rapidly
-Owner must verify hundreds or thousands of claimed costs
-Owner more susceptible to dishonest contractor and fraud
|Unit Price||-Accurate estimation of overhead costs and general conditions|
-Used when there is variability in amount of materials or time
|-Final cost unknown until the completion of the project
-Creates an unbalanced bid due to 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 for the process to go more smoothly. A few of the necessary parts that can be expressly assigned to either party include:
- Obtaining permits – new construction and additions to existing buildings often requires approval by the local authority and obtaining a permit.
- Providing materials – materials for construction can include cement, drywall, wood floors, or paint.
- Buying fixtures – remodeling and construction often involves 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.
3. The Consequences of Not Using a Construction Contract
Say your contractor and his team suddenly stopped working, and he or she is demanding excessive payment for materials and labor not originally agreed upon. Or, your client, the owner, is refusing to pay you after completion of the project. Either way, you’ll want to make sure 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 are unable to use the property for the intended purpose at the intended 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. Liquidated damages are a set amount per day that the contractor will pay to the owner for each day that construction is delayed. Rather than litigating damages in court, the owner and the contractor can agree in advance on a liquidated damages amount.
In order for liquidated damages to be upheld, the owner’s damages must be uncertain or difficult to determine ahead of time. In addition, the liquidated damages must be a reasonable amount and cannot be a penalty. And the delay in construction cannot be due to circumstances beyond the contractor’s control, such as changes in the work or extreme weather.
Here are some common causes of delays in construction:
- 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 be enough to cover the full amount of damages that the owner suffered. Or it may be greater than the amount a court would have ordered. However, with a liquidated damages clause, the owner can be assured that he or she will recover some amount for delay in construction, and the contractor can limit his or her exposure.
A simple Construction Contract Agreement could help prevent and resolve some of these issues:
|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|
4. Free Construction Contract Template