Construction contracts are the binding legal documents used to establish the guidelines of the builder-builder relationship. The construction contract is the framework of the project; it outlines the amount of the contract, financing terms, start and finish dates, draw schedules, insurance requirements, warranty information, and other relevant construction issues.
A construction contract ensures that the buyer and builder understand what is expected from each party. With a well-written construction contract, a bad construction experience can be avoided.
This guide is designed to equip you with the knowledge and tools necessary to draft a contract that not only safeguards your interests but also sets the stage for a successful construction project. From defining project specifics to laying down dispute resolution mechanisms, we will walk you through each step of drafting and writing a comprehensive construction contract, ensuring that both parties are on the same page from the outset.
Contract Signer Information
A construction contract defines the terms of the project since these points often differ from one party to another. An attorney should be consulted to ensure that the contract is complete, accurate, fair, and enforceable, as well as brought in to act as a witness at the contract signing.
The contract’s date and the names of all parties are provided first in a construction contract. List the address, phone, fax, and e-mail for each party. Include contact procedures for each party to allow for easy communication if problems arise.
Once the parties are listed, proceed to the formulation of the main parts of the construction project: location information, financial information, project expectations, and dispute resolution procedures.
Financial Declaration
Provide a description of the property with the street address, name of the subdivision or building community, and information about the Homeowners’ Association.
Once the location of the project is established, indicate the financial aspects of the construction project. In this section, list the agreed-upon payment amount and any available financing terms. Include the payment terms for the contractor by clearly defining the schedule for construction draws and the procedure for the contractor to follow when submitting draw requests.
Financing options often require insurance, so list the insurance requirements of the project. After the financial information is laid out, the construction contract should focus on the terms governing the construction project.
Project Location Summary
Specify the date the project should begin and a definition of what is expected.
Following the start date, list the anticipated deadline for completion and include a definition of what constitutes completion. Include a section that lays out the conditions under which delays will and won’t be excused and define the penalties and fines for failure to abide by the contract dates.
Once the dates of construction are defined, include a section within the contract that details project expectations.
Project Expectations
Expectations for the project include plans, drawings, sketches, and blueprints. Include this information and add information concerning substitution policies, change order procedures and policies, and any exclusions of the construction contract.
List the access terms each party has to the construction site, and include each party’s rights to inspect the project and inspection procedures.
After listing each party’s information, the project’s location, financial information, work specifications, and access rights, include a section for dispute resolution and attach state and local documents as required by law.
Dispute Resolution and Contract Signing
Dispute resolution procedures are important within a construction contract. Include an arbitration clause, settlement terms, and formal notification procedures. To avoid disputes arising from warranty issues, clearly list the warranty and service policies for the construction project.
Attach documents required by state and local laws to the contract, and the construction contract is complete. Have all parties and the witness sign and date each page of the contract.
Things to Include in a Construction Contract
A construction contract should clearly outline the most important items necessary for the fulfillment of the contract by the parties to the agreement. These contractual provisions help minimize miscommunication and misunderstandings related to a variety of matters, including insurance, payments, deadlines, and other matters.
Insurance
A construction contract should include language on the responsibilities of each party regarding insurance for the project.
Contractors should carry liability coverage and worker’s compensation insurance. Also, check the coverage to ascertain if the policy covers problems with work that appears during the warranty period.
Many individuals include requirements that the contractor and subcontractor provide copies of insurance policies. In addition, the agreement may dictate the amount of coverage required.
Payments
Generally, construction agreements contain payment schedules for each component of the construction job, such as masonry, plumbing, electrical, and heating. Once the contractors have material and labor completed in accordance with the specifications and applicable building codes, the owner pays the prime contractor. Payment should also include a percentage of overhead and profit.
Prime contractors usually include clauses in their contract, such as the subcontractor receives payment only after the owner pays the prime contractor. Another popular provision states that the subcontractor assumes liability if the project owner goes bankrupt or cannot pay for any reason.
Schedule Clause
Most construction agreements include a start date for the project and the conditions under which this date can change. Some factors that may justify a different commencement date include issues with funding, completion and delivery of the plans and project specification and the necessary municipal building permits.
Another item under this provision concerns the project duration. The project duration component stipulates the time the general contractor has to finish most of the work, or “substantial completion,” as outlined in the contract.
The parties should calculate the period in terms of “working days,” or the number of days the contractor and project owner anticipate for completing the project. Define valid reasons for modifying the project’s duration, such as weather, unforeseen conditions, or problems with subcontractors.
Retainage
Typically, the majority of construction contracts allow the owner or project manager to withhold a portion of the progress payments until the completion of the project. This provision provides a safeguard for the owner should the prime contractor or subcontractor breach the agreement.
In an indirect way, retaining a percentage of the progress payments provides an inducement for the contractors to complete the project in accordance with the agreement.
Change Orders
Change orders refer to written agreements between the project owner and the contractor to change certain items in a construction contract. The modification may add or delete from the existing agreement.
The original contract should define a change order. This extra work may necessitate additional compensation and time. In some cases, the change order may actually reduce the contract price and/or duration. Some common reasons for change orders include modifications in the building specifications or plans, as well as actions necessary to fix design deficiencies. Weather conditions and unforeseen matters can also necessitate change orders.
In conclusion, the construction contract is far more than just a legal formality; it is the blueprint for a successful and mutually beneficial builder-client relationship. Through this guide, we have explored the essential components that make up a well-structured construction contract.
A well-drafted construction contract is a testament to professional integrity and foresight and is instrumental in steering a construction project toward timely and quality completion. Armed with this knowledge, you are now better prepared to navigate the complexities of construction contracts, ensuring your projects are built on a solid legal and communicative foundation.
