Construction Contract: Definition, What's Included
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A construction contract is a legal document between a client and a general contractor outlining the scope, cost, and terms of a construction project. 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 Templates
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Why It’s Beneficial to Consider a Construction Contract
A construction contract is essential for various reasons. The person associated with it can be a property owner, a contractor, or even a subcontractor. Here are the key reasons to choose a construction contract:
- Certainty: Contracts establish better expectations by defining project scope, timelines, quality standards, and payment terms. This clarity helps prevent misunderstandings and disputes during the project.
- Quality Assurance: Contracts often include specifications and quality standards that the contractor must meet. This ensures that the project meets the desired quality and performance standards.
- Cost Control: Contracts specify the project's budget and payment schedule. This helps control costs by ensuring that payments are tied to specific project milestones and deliverables.
- Project Timeline: Construction contracts establish a timeline for project completion, including milestones and deadlines. This keeps the project on track and ensures that parties are held accountable for delays.
- Payment Terms: Contracts define the payment structure. It includes the amount as well as the conditions for payment. This clarity ensures that contractors, as well as subcontractors, are compensated for their work in a fair way.
- Change Orders : Construction contracts typically address how changes to the project scope are managed. This includes the process for documenting and approving change orders, which helps prevent scope creep and cost overruns.
- Regulatory Compliance : Contracts may require compliance with local building codes, permits, and regulations. This ensures that the project meets legal and safety requirements.
- Performance Bonds and Insurance: Contracts may require contractors to obtain performance bonds and insurance, providing financial protection in case of default, accidents, or damage to property.
- Subcontractor Agreements : Construction contracts often allow for subcontracting work. Subcontractors enter into agreements with the primary contractor, ensuring that they also have legal obligations and protections.
- Project Completion: Contracts may include guarantees of project completion and penalties for delays or non-completion. This incentivizes contractors to meet project deadlines.
- Documentation: Contracts often specify documentation and reporting requirements, ensuring that parties maintain records of project activities, communications, and changes.
- Ownership and Title Transfer : For property owners, contracts establish the transfer of ownership and title upon project completion and final payment.
- Professional Relationships: Contracts set the tone for professional relationships, fostering trust and accountability among all parties involved.
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Clauses in a Construction Contract
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.
Components of a Construction Contract
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.
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.
Legal Considerations for a Construction Contract
Construction projects have several associated risks and complexities. That is why one should address all the legal considerations associated with the documents as mentioned below:
- Price and Payment: Specify the contract price and the payment schedule. It includes any milestones as well as progress payments. Address issues like delays in payment and retainage.
- Performance Deadlines: Set specific deadlines for project completion and define the consequences of delays. It also includes liquidated damages or extensions of time.
- Change Orders: Establish a process for handling changes to the project scope. The process involves pricing adjustments, documentation, as well as approval requirements.
- Quality Standards: Outline the quality standards and materials to be used in the construction, meeting industry, including the regulatory standards.
- Insurance and Liability: Define insurance requirements for both parties, including general liability, workers' compensation, and property insurance. Clarify liability for accidents, damage, as well as delays.
- Permits and Approvals: Ensure that the contractor obtains all necessary permits as well as approvals required for the project.
- Warranties: Address warranties for workmanship, materials, and equipment. Also, outline the duration and terms of these specific warranties.
- Indemnification: Specify the indemnification provisions to note which party is responsible for covering certain losses, liabilities, as well as claims.
- Termination: Establish conditions and procedures for contract termination. It must include the rights and responsibilities of all the associated parties in the event of termination issues.
- Subcontractors: Define the contractor's ability to subcontract portions of the work. The same person must also outline any approval processes as well as requirements for subcontractors.
- Safety and Compliance: Include clauses related to safety practices, compliance with applicable laws and regulations, as well as adherence to industry standards.
- Force Majeure : Address force majeure events (unforeseeable circumstances, like natural disasters) and their impact on the contract, including delay or termination provisions.
- Environmental Considerations: Comply with environmental laws and regulations. All of them must address issues like hazardous materials, waste disposal, as well as environmental impact assessments.
- Ownership of Documents: Specify the ownership and rights to project documents. The examples to take into consideration are plans, drawings, as well as specifications.
- Confidentiality: Include confidentiality provisions to protect sensitive project information and data.
- Insurance and Bonding: Ensure contractors have the required insurance and bonding to cover potential risks and liabilities.
- Records and Documentation: Establish record-keeping and documentation requirements, including submitting project reports, change orders, and as-built drawings.
- Compliance with Local Laws: Be aware of and adhere to local, state, and federal laws and regulations governing construction contracts, including labor laws, tax regulations, and licensing requirements.
- Notice Provisions: Clearly outline requirements for providing notices and communications between the parties, including timelines for notification.
- Sustainability and Green Building: Address sustainability and green building standards, certifications, and practices in the contract, wherever applicable.
- Contract Review : Always have a legal professional review the contract to ensure compliance with all relevant laws and protect your rights and interests.
Final Thoughts on Construction Contracts
Construction contracts can have many types, but their aim remains the same. So, such agreements try to make all parties agree to the terms and conditions associated with a particular project. They help protect the interests of everyone working on a construction project. However, a lawyer must be contacted immediately if either party is unsure about the terms and conditions to be added to the contract. However, the chosen professional must already have enough expertise in working with construction contracts. It will help them draft a contract that caters to the needs and benefits of either party.
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