A Construction Contract is a contract between a client and a contractor that specifies the details of a construction project.
The details in a construction agreement 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 in addition to the building contract before contractors can begin working.
Types of Construction Contracts
The choice of contract type depends on factors such as project complexity, budget, timeline, and the relationship between the parties involved.
Here are some of the main types of construction contracts:
Lump Sum or Fixed Price Contract
In a lump sum contract, the contractor agrees to complete the project for a fixed price specified in the contract. It is suitable for well-defined projects with clear plans and specifications.
Cost-Plus Contract (Cost-Reimbursable Contract)
In a cost-plus contract, the owner reimburses the contractor for the costs incurred during construction plus an additional fee or percentage of profit.
This type of contract is often used when the project scope is uncertain or when changes are expected.
Time and Materials Contract
Time and materials contracts are similar to the cost-plus ones but with a more straightforward fee structure.
The owner pays the contractor based on the actual time spent and the materials used, along with an agreed-upon profit margin or markup.
Unit Price Contract
In a unit price contract, the contractor is paid based on the quantity of specific items or units of work completed. Unit prices are predetermined and specified in the contract.
This type of contract is expected in projects with repetitive elements, such as road construction.
| 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. |
How to Manage a Construction Project
Let’s explore the critical phases of managing a construction project effectively.
Design Conception Phase
This phase marks the inception of the construction project, where the initial ideas and concepts are developed into a clear vision.
Key Activities:
- Project initiation: Identifying the need or opportunity for the construction project.
- Feasibility study: Assessing whether the project is viable regarding budget, resources, and overall goals.
- Preliminary design: Creating high-level sketches and concepts.
- Stakeholder engagement: Gathering input and feedback from potential users, investors, and other stakeholders.
At the end of this phase, you should have a well-defined project concept, a rough budget estimate, and a sense of whether the project should proceed.
Pre-Construction Phase
This phase focuses on planning and preparation before actual construction work begins.
Key Activities:
- Detailed design: Developing comprehensive construction plans, drawings, and specifications.
- Permitting and approvals: Obtaining the necessary permits and approvals from regulatory authorities.
- Budgeting and procurement: Finalizing the project budget and procuring necessary materials and services.
- Contractor selection: Identifying contractors, subcontractors, and suppliers and awarding contracts.
- Construction schedule: Creating a detailed timeline for construction activities.
By the end of this phase, you should have a detailed project plan, a fully designed project, a budget, contracts in place, and all necessary permissions.
Construction Phase
This is the stage where the physical construction of the project takes place.
Key Activities:
- Site mobilization: Setting up the construction site, including temporary facilities and utilities.
- Construction work: Executing the project according to the plans and schedule, including earthwork, structural work, and finishing.
- Quality control: Regular inspections to ensure work meets the specified quality standards.
- Safety and site management: Enforcing safety protocols and managing day-to-day construction activities.
- Progress reporting: Keeping stakeholders informed about construction progress.
With visible construction progress, the project should start taking shape during this phase.
Performance and Monitoring Phase
This phase is about monitoring construction progress, quality, and compliance with the project plan.
Key Activities:
- Continuous monitoring: Tracking progress, costs, and quality throughout construction.
- Issue resolution: Addressing any problems, change orders, or unforeseen issues that arise.
- Documentation: Maintaining detailed records of construction activities and changes.
- Communication: Regular updates to stakeholders about progress and any changes.
The main output is ongoing project performance data and documentation, which helps decision-making and issue resolution.
Project Closure Phase
This phase marks the end of the construction project and involves wrapping up all activities.
Key Activities:
- Final inspections and approvals: Ensuring the construction meets all required standards and specifications.
- Handover to the owner: Transferring control and responsibility of the facility to the owner or operator.
- Closeout documentation: Completing all required documentation, including as-built drawings, operation manuals, and warranties.
- Final payments: Settling financial matters, including any outstanding payments to contractors and suppliers.
The key outputs include a fully completed and operational construction project, all necessary documentation, and handover to the owner or operator.
Each of these construction phases is critical for completing a project. Effective project management, communication, and collaboration are essential to ensure the project meets its objectives, stays within budget, and complies with quality and safety standards.
The Consequences of Not Using a Construction Contract
If you don’t have a contract, you risk wasting time and money, not to mention the quality of the construction. 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, refuses to pay you after completing the project.
Owners can protect against construction delays 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 the contractor will pay the owner for each day that construction is delayed.
