Sample Construction Contracts Explained
A construction contract is a formal agreement outlining the scope of work between a client and a contractor. It is executed once each party agrees to the conditions of the project, including the schedule or timeline, fees and payment plans. Adhering to this agreement ensures that both the contractor and the client meet their respective contractual obligations. As with other types of contracts, construction contracts are full of legalese and jargon, and often use other terms in the construction field.
Construction contracts can take many forms , but they all serve the same purpose – to lay out the various aspects of a project in mutual agreement for its completion without dispute. A construction contract generally includes:
- Work description
- Project schedule and timeline
- Payment terms
- Terms of default
- Warranties
- Environmental cleanup clauses
- Dispute resolution process
- Job site and post-sale safety requirements
Construction contracts are typically drawn up on standard forms, most often based on sample construction contracts. These sample construction contracts can vary depending on what type of work is being completed. For an example, there may be slight differences in the language found in a residential construction contract as compared to that contained in a commercial one.
Characteristics of a Sample Construction Contract
For both the property owner and the contractor, it is necessary that the construction contract or subcontract be valid, clear and enforceable in all relevant respects. A sample construction contract should typically cover the following components:
Scope of Work. This section should set forth in detail the project. All contemplated work, materials to be used, deliveries, travel costs, and other relevant expenses must be factored into the pricing scheme.
Payment Terms. The contract should reflect any deposit and when the deposit is due, as well as the remaining payment schedule, including the final payment due to the contractor at the conclusion of the project.
Time Estimates. The contract should set forth the anticipated date of completion of the project as well as any relevant intermediate deadlines.
Termination. The contract should provide any conditions for the termination of the agreement by either party as well as any rights that either party may have upon such termination.
Certificate of Occupancy. For residential projects, the contract should set forth terminology indicating that the homeowner will not be required to make final payment for completed work until the project passes a municipal inspection and receives a certificate of occupancy.
Dispute Resolution and Arbitration. The contract should provide that if a dispute arises, the parties should attempt to resolve the dispute informally within a set period of time before any litigation can commence. California law dictates that an arbitration clause must specifically state that the parties are relinquishing their rights to a jury trial.
Categories of Construction Contracts
With so many different types of construction projects, there are also many different types of construction contracts out there. The most common type of construction contract is a fixed price contract, in which the scope of work, and the price for the work is negotiated ahead of time. Fixed price contracts tend to benefit the contractor, because they cannot go back to the owner for more money once the contract is signed. Therefore, contractors must build in some cushion for themselves in case something takes longer than expected or they did not price it as accurately as they should have. This can lead to some ethical questions if a contractor believes the owners are wealthy and can afford to pay more because of the building’s location or because of the homeowners’ profession.
Cost-plus contracts are the opposite of fixed price contracts. As the name implies, cost-plus contracts have the contractor pay the cost of the work, and a percentage on top as their profit. Cost-plus contracts can be risky for the property owner because there is no incentive to keep costs down, and the labor and materials costs could be over-inflated, but they are a good idea if the job is complicated and the true extent of the cost is unknown at the time of contracting.
Time and materials contracts are a hybrid of fixed-price and cost-plus contracts. Rather than estimating the cost of the work, the contractor pays its wage and the cost of the materials and the owner pays that plus a set fee per hour of work. Time and materials contracts allow owners to take advantage of experienced contractors, who will work quickly and efficiently, but take away any incentive to work slowly because the contractor gets paid more the longer the job takes. Owners also risk the contractor using more man hours than necessary unnecessarily, which is not out of the realm of possibility, especially if the owner is away from the home and cannot monitor the contractors progress.
There are pros and cons to each type of contract. Understanding those pros and cons could make or break your building project. If you are considering building a new home or making substantial renovations to an existing home, consult an attorney.
Developing a Construction Contract
Once an agreement in principle is reached, a written construction contract should be prepared and signed. This agreement should state clearly all the agreed terms. Items that should be considered include: Even though many contractors make a habit of not executing written contracts, it is strongly urged that all contractors prepare a written contract in their favor containing all the above items, and if not possible, at least those items that are reasonable. This may seem like overkill, but in a world of litigation, everyone who wants to do business with you will want to see your contract, or at least a copy of it. You may also find a sophisticated client who wants information about your company in advance, which means because of your unique size and expertise you will have to tailor a contract to this individual or entity. The downside is, if this client is a big shot, you may lose him or her. The upside is that you will be forced to make your contracts better and more thorough. If you put language in all your contracts dealing with timely payment of invoices, you can use those provisions as precedents when preparing similar documents for others. In any case, each of the above issues should be dealt with to the degree possible. It is best to put language into the contract that everyone understands and assumes to be there even if it appears to be "boilerplate." Otherwise you may find in the future that the other party had a different view of what was to be agreed to and may move into court to try to avoid the written contract. If not in writing, it is harder to prove the existence of an agreement and the terms and provisions. The other party may try to argue that there was no contract or offer to contract, and try to get out of the contract. The written contract attempts to avoid those arguments. Also, if work goes to the law, the attorneys and court will need something to refer to as the contract so arguments can be made and evidence gathered to explain the terms of the agreement. In the end, you may want to have an attorney draft the contract so it complies with statutes and case law, contains all necessary provisions, and is guaranteed to be enforceable. Even though that may cost some money up front, it will save you a lot of additional legal fees later after the work is done.
Common Mistakes Found in Construction Contracts
Construction contracts frequently present a number of potential pitfalls for the unwary. An example of a failure to make clear the responsibilities of the contractor with respect to obtaining any and all required permits can be seen in Washington v. City of Walcott, 1984 WL 47607 (Iowa 1984), where the contract stated: It is the contractor’s responsibility to make sure that all permits or approvals are obtained. If permits or approvals cannot be obtained due to any reason including the denial of the contractor’s application for such permit or approval, the contractor shall be responsible for additional costs incurred to complete the work as provided herein. In that case, the contractor and subcontractors filed a lawsuit against the general contractor, alleging that they were owed the outstanding balance on the construction contract and for damages for breach of contract, including their alleged failure to obtain a plumbing permit and problems with a gas line. The contract also stated: The owner shall reimburse the contractor for additional expenses sustained by the contractor as a result of the inability to obtain any required permits or approvals. The court held this clause to be unenforceable because it was in conflict with the clause relating to the contractor’s responsibilities and because it did not require the contractor to perform all necessary work despite any failure to obtain the relevant required permits, i.e., it did not prevent the contractor from failing to obtain all required permits and still being entitled to receive the balance due under the contract.
Another particularly common pitfall that traps parties to contracts is that the relationship might be terminated without the other party having any recourse. For example, where the contract provided: Either party may terminate this Agreement upon fifteen (15) days’ written notice in the event of a material breach of this Agreement by the other party … . A court in Georgia held that this clause was essentially an agreement to create a lease at will and that a 15-day written notification was not a sufficient notice to terminate a commercial relationship. O.C.G.A. ยง 44-7-7 requires that a lease be for more than a year to be valid and that it be in writing for it to be enforceable. Sano-Rubin Constr. Co. v. Marietta Hous. Auth., 701 S.E.2d 481, 485 (Ga. Ct. App. 2010), review denied (June 3, 2010).
Another common situation raising issues is when one party includes a pay-if-paid clause, which leads to issues as to whether it effectively shifts the risk that the owner will not pay to the subcontractor. For example, in SVC W., LLC v. Bartlett & West, Inc., 859 F. Supp. 2d 1227 (D. Colo. 2012), the parties had a contract where the invoice payments to one contractor would be contingent and subject only to the owner receiving payment. The general contractor was only required to pay the subcontractor if and when it received payment from the owner, so the subcontractor raised the issue of whether the clause was unconscionable. The subcontractor argued that the pay-if-paid clause shifted the risk of non-payment from the general contractor to the subcontractor. The general contractor argued that the clause was typical among the construction industry in Colorado and that such a clause was reasonable so long as it did not require the subcontractor to pay out of its own pocket but instead allowed it to recover amounts owed under the contract. Both parties made compelling arguments. The court denied both parties summary judgment, but by adopting the parties’ rationale the court seemed to conclude that the specific terms of the contract would dictate the enforceability of an internal pay-if-paid clause.
Evaluating a Sample Construction Contract
When it comes to reviewing a sample construction contract, the first step is to familiarize yourself with the terminology used in the document. Specific terms may not be used in the same way as they are used in everyday life, and this can affect the provision of the contract. For example, a "contractor" or "subcontractor" not only refers to a third-party hired by an individual or business but can also refer to the homeowner. There are just as many opportunities, if not more, to get things wrong in a sample construction contract as there are to get things right.
Once you are able to get a grip on the language used in the sample construction contract (or new construction contract), it will be time to perform a close review of the provisions. As you might expect, not all construction contracts are created equally. Some sample contracts are a lot more detailed than others. What you need to do is make sure that you and your client understand all aspects of the contract and what each means, both individually and as a whole.
If something doesn’t make sense, it can always be revised. There is no problem in marking up a sample construction contract so that it more accurately reflects the specific project in question. It could be the language itself that you believe needs to be changed, either for clarification purposes or to reflect the scope of work. There could be something entirely missing from the sample contract that you know or suspect should be included, or there could be something that will become unnecessary as a result of an aspect unique to your project. No matter what the case may be, a revision may be necessary.
Never rush through a construction contract to sign it as quickly as possible. Regardless of whether you hire a contractor or work on the construction project yourself, you will need to ensure that the contract is in order for your own legal protection. It only takes one mistake or misunderstanding for either a project or relationship with a contractor to go wrong. To avoid finding yourself in a difficult position, you should always review everything carefully first, ensuring you have the opportunity to address concerns as needed.
Legal Issues and Regulations
When using sample contracts, it is essential to ensure that the agreements are compliant with applicable laws and regulations. Legal aspects related to taxation, labor and industry regulations, and licensing requirements must be carefully considered when drafting and signing contracts.
Navigating the legal landscape requires an understanding of local laws, industry norms, and regional regulations. For instance, certain jurisdictions may have specific rules governing the payment process, the timing of payments, or even late payment fees. Additionally, projects that require government permits or approvals may face contract-specific requirements prior to the start of the work or during the completion of the contract.
Certain contracts and forms may be used in a variety of other settings, not necessarily in your area. Therefore, when using these forms as templates, consider the relevant laws and regulations in your area. Through intelligent preparation and by using the correct form, you can protect yourself from any penalties or fines.
The execution of a construction project requires the involvement of professionals with legal expertise. They have the knowledge and experience to ensure that the contracts you use do not contain any errors or omissions that could limit the ability to enforce the terms in the future. An attorney will draft the document so that it is easy to read and provides clear definitions for specialized language and terminology.
When it comes to disputes, having an attorney prepare the contract may prove to be extremely valuable. Relying on a general guideline or template may not be sufficient for the circumstances of your construction project. The document should be tailored to meet the needs and protect the interests of all parties involved. Legal assistance will provide you with peace of mind so that you can focus on the actual project.
Signing and Finalising the Contract
After navigating the various sections and terms of the construction contract, the final steps include obtaining the signatures of the parties executing the contract. The final draft should be reviewed one last time against the executed contract or proposal from which it was derived to ensure that all terms and other provisions are mutually agreed upon in their final form. Many times, the original contract or proposal is modified several times before it is finalized for signature . It is important that all previous modifications or alterations be accounted for on the final document, and that all parties executing the contract are present to sign. Obtaining the signatures from the parties directly helps to avoid disputes down the road about whether that party actually intended to agree to the contract terms and conditions stipulated in the executed document.