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What Is a Construction Contract?
A construction contract is an agreement between a client that wants construction done and a general contractor. This type of contract details the contractor's scope of work, including their right to subcontract any of the work, how and what they will charge for the work, and any applicable plans or work orders. Construction contracts are typically split into four main categories:
- Fixed price: A contract that includes a set price or lump sum fee for all services provided, including all labor and materials
- Unit pricing: A contract that outlines the cost per unit, such as the cost per square foot or another measurement unit
- Time and material: A contract that requires the client to pay the contractor for all labor and materials at a pre-negotiated rate, which is higher than what the contractor pays their staff
- Cost-plus : A contract that requires the client to pay the actual cost for the labor, materials, and other expenses, as well as a fixed fee or percentage of the total costs
What's Included In a Construction Contract?
A strong construction contract should outline the scope of the project in as much detail as possible to leave little to no room for confusion on either side. This type of contractor often includes individual documents that detail the various aspects of the project, such as who will be responsible for performing certain tasks, the expected project timeline, payment terms and cost requirements, and other important details. It is typically executed between the general contractor handling the project and the owner of the project or building being construed.
Subcontractor details are often included in a construction contract as well when a contractor plans to hire out some of the work on the job. A general contractor may handle some or all of the tasks associated with a construction project, or they may bring in other companies and individuals. When subcontracting, the general contractor is responsible for managing contracts and payment terms with the subcontractors. The owner of the project does not generally interact with subcontractors.
Construction Contract Clauses
Many construction contracts follow a certain format to ensure that the proper information and details are included. They may also include certain clauses that protect the general contractor and/or the project owner. One example is an escalation clause, which is typical on a larger construction job that will take a year or longer to complete. An escalation clause protects the contractor from a price change on certain materials, ensuring that they aren't responsible for the added cost after the contract has been signed. Examples of escalation clauses in construction contracts include:
- Oil-based products
- Steel
- Fuel and gas
Here is some more information about escalation clauses.
Contract Negotiations
After a construction contract has been drafted and reviewed by all parties, the next step in the process is often the negotiation process. During this process, the involved parties will bring up areas of concern within the contract and make requests. If the other party or parties agree to the requests, those changes can be made within the contract. If disagreements come up, the parties may have to make accommodations or compromises to ensure satisfaction on all sides. Negotiating a contract can be done via email or in person.
Construction Contract Common Language
Construction contracts will often include key elements and common language. Some examples of these contract elements or language components include:
- General contractor: The company or individual responsible for overseeing the construction process and managing any subcontractors, if applicable
- Owner: The individual or company hiring the general contractor and entering into the contract to have construction work done
- Job site: The physical location where the construction work will be completed (may be an address or description of a location if no address is available)
- License number: The number issued by the state licensing board to the general contractor, indicating their legal status to work as a general contractor and provide the services outlined in the agreement
- Description of work: An outline of the scope of work planned for the project (may include specifications, plans, portions of work being hired out to subcontractors, and other critical details)
- Contract documents: Any related documents, such as blueprints, designs, exhibits, drawings, renderings, or similar components related to the work being done
- Price and payments: The cost for the work outlined in the agreement, as well as payment terms (how and when the owner will make the payments to the general contractor)
- Labor and materials: Who is responsible for procuring the materials, as well as any costs associated with the labor and materials needed to complete the work
- Timeline: The planned start and end date (may include details about when certain tasks will be complete or any phases planned for the project)
- Permits and licensing: Outlines which party is responsible for requesting and obtaining any necessary permits and licensing to complete the scope of work
- Change requests: Describes how any requested changes will be communicated to the general contractor, as well as any fees required for change orders and timelines for when changes can be requested and handled
- Warranty coverage: Whether the general contractor provides any type of warranty on the work and the period of time in which the work is free from any material defects
Depending on the scope of the project, a general contractor may include additional components or language elements:
- Indemnification: The responsibility of the contractor for any damages or loss incurred by the owner due to the work of the contractor
- Termination: When either party can legally terminate the contract and any penalties that may apply to the decision to terminate
- Inspection: The right of the owner to inspect the work being completed to ensure that it aligns with the terms stated in the construction contract
- Dispute resolution: The acceptable methods for resolving any disputes that may arise before, during, or after the construction process, such as arbitration, adjudication, or mediation
- Insurance policies: Which party is responsible for obtaining insurance to protect against losses and damages, as well as any minimum value requirements for insurance policies
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Sample Construction Contract
This construction contract agreement (the “Agreement”) has been entered into on March 21, 2020, by and between Jason Jones (the “Owner) and Orton Construction Services (the “Contractor”). Contractor is a licensed general contractor in the state of Nevada, in good standing, with the contractor's license number 23097645, and
Whereas, Owner owns property located at 359 E. Main Street, Henderson, Nevada, 89002 and wishes to have certain work performed by Contractor at that property.
Therefore, in consideration of the mutual promises and consideration exchanged by Owner and Contractor as set forth in this Agreement, both agree to the following terms:
Description of Work: Contractor shall perform all work described in Exhibit A in accordance with Owner's contract specifications and plans at the property.
Contract Price and Payments: Owner agrees to pay Contractor for the work in the total amount of $15,000.00 USD (the “Contract Price”). Payment for this work will be made by two wire transfers on the following dates:
1 April 2020
1 October 2020
Contract Price is subject to additions or deductions in accordance with any mutually agreed upon modifications or changes to the work.
Materials and Labor: Contractor shall pay for and provide all materials and labor required to complete the work outlined in the description of work, including any necessary equipment, machinery, tools, and transportation.
Here are some additional construction contract samples and templates.
Understanding what may be included in a construction contract and its purpose can help you move forward as either party in this type of agreement, as well as know what to include in a contract if you are planning to hire a construction lawyer
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