A Guide to Construction Contracts

Whether you’re a property owner, contractor, or subcontractor, understanding construction contracts is necessary. You need to know what they are and the basics of negotiating and drafting one before hiring construction services. This guide aims to help you do that.

What Are Construction Contracts?

Construction contracts are legally binding agreements between specific parties in a project. Since a project may involve several separate but related contracts, each agreement clearly defines the responsibilities of the parties it covers.

Construction Contract Types

There are different types of construction contracts. The type you choose will mainly depend on who will absorb the project’s overruns if it exceeds its budget. Here are a few common types you may come across:

Fixed-Price Contracts

Here, a contractor agrees to undertake the construction project for a fixed price. If the labor or materials cost more than anticipated, the contractor will absorb the difference.

Cost-Plus Contracts

With these contracts, the property owner agrees to reimburse the contractor’s labor and materials expenses and also pay an agreed-upon percentage or fixed fee.

Time-and-Materials Contracts

Under these contracts, the property owner pays the contractor for their time and the construction materials they use.

Unit-Price Contracts

Here, the contractor’s payment depends on the amount of work they complete. The fee is usually based on a set price per unit, such as a cubic yard or linear foot.

What To Include in Your Construction Contract

Understanding construction contracts isn’t just about learning the different types that exist. You should also be familiar with the key components that a well-drafted contract must include, such as the following:

• Scope of work: This is a full list and clear description of all the work to be done and the parties responsible for doing so.
• Project timeline: This states the project’s start and end dates and includes the expected milestones.
• Price, payment terms, and schedules: These cover the project’s total price and payment schedules.
• Change orders and amendments: These define the procedures for managing changes to the construction project’s scope of work.
• Notice and claims procedures: These state who should be informed of what, by when, and in what format.
• Warranties and guarantees: They define the standards for materials and workmanship and the remedies available if those standards aren’t met.
• Dispute resolution clauses: These establish procedures for addressing disputes.
• Termination rights: These state the circumstances under which the contract may be terminated.

How To Draft or Review a Construction Contract

Drafting a clearly defined construction contract or reviewing one that’s been provided to you may seem like a lot of work. However, the process is easier when you know the steps to follow.

Start With the Scope and Structure

Begin by defining the scope of work, the deliverables, and the pricing and payment structure. Your precision here will help get everyone on the same page.

Review the Risky Clauses

Pay close attention to the clauses that carry the most risk. For instance, when signing a home-building contract, timing is crucial. In such a case, it helps to ask if the timeline is realistic and identify circumstances that would warrant extensions.

Compare the Different Agreements

Most construction projects involve multiple interconnected contracts. It’s important to review all related documentation and address any inconsistencies between your requirements and the subcontractors’ obligations.

Document the Negotiation

Track the negotiations and record the terms every party agrees to and why.

Perform a Final Consistency Check

Before signing, make sure that the terms, figures, dates, and other clauses are consistent across all documentation.

A Few Tips To Help You Along the Way

Considering all that’s potentially at stake, you want your construction contract to be as thorough as possible. While this can be hard to do, the following tips can help:

• Try to anticipate problems: Consider likely problems and add clauses that will help you address them.
• Be specific: Ensure that you are as precise as possible to avoid any misunderstandings.
• Seek legal advice: Consult an attorney who focuses on construction law for guidance.

Quality Construction Services You Can Trust

While the thought of seeing your vision come to life is exciting, there will be several hurdles along the way. Since many of these hurdles are unavoidable, it’s best to prepare for them. This is why understanding construction contracts is so crucial. The right preparation will help you ensure that all parties know their contractual obligations and what happens if they don’t meet them.

Although construction contracts are vital to protecting your interests, your project’s success will also depend on how you go about choosing a construction company. At Michael Marini Construction, we stand behind our work and take pride in bringing your vision to life with care and quality craftsmanship.

Call us at (408) 310-8732 to find out why we’re the right fit for you.