Project Management

Moving Forward With a New Project? What You Need to Know About Construction Contracts

When you’re about to embark on a construction project, you want to make sure that you and your client are on the same page. And the best way to get on the same page—both from a project and a legal standpoint? Drawing up a construction contract.

A construction contract lays out the details and expectations of a project to make sure everyone is in agreement before the work starts.

But why are contracts so important? What are the different types? And what do you need to include in your construction contract? Here’s everything you need to know before you get started on your next construction project

 

What’s a Construction Contract—and Why Is It Important?

First things first. Before we dive too deep into construction contracts, let’s take a moment to define what exactly it is. And why it’s so important.

A construction contract is a legal document that outlines, in detail, the parameters of a construction project. The contents of the agreement will depend on the type of project and the type of client. For example, your contractor agreement for a residential client would typically look different from a commercial client contract. Regardless of the project or client, it’s crucial to have a concrete contract in place from the beginning.

Having a legal construction agreement in place offers a layer of protection for both the contractor and the client.

Concrete contracts help protect your business and your client over the course of the project. Without that contract in place, you can run into issues if either party has a dispute.

For example, without contract documents outlining the project’s scope, you might run into a situation where a client insists on additional construction services—without paying for them. Or let’s say you’re struggling to collect payment from a client. If you don’t have a construction contract that clearly outlines your payment schedule, your client can argue that they don’t have to pay you by any specific date—which can wreak havoc on your business’ finances.

The point is, construction contracts will help get you and your client on the same page. And even if, for whatever reason, you don’t stay on the same page, those contracts will help ensure that both you and the client follow through on the terms of your contractor agreement.

What Are the Four Types of Construction Contracts?

There are a variety of ways to structure a contract. But generally, a construction contract will fall into one of the following four categories:

• Lump-sum/fixed price: This type of contract rolls the costs of the entire project into a single lump sum or fixed price (hence the name). While there may be added incentives for finishing before the stated completion date (or penalties for finishing later), the client will only be responsible for paying the set price outlined in the contract.
• Cost-plus: A cost-plus contract requires the client to pay for all the costs associated with the project, including labor and materials. The client will also pay an additional fee (a fixed fee or a percentage of the total project costs) to cover the contractor’s overhead and profit.
• Time and materials: A time and materials contract sets an hourly or daily rate for the contractor. In addition, clients agree to pay for any additional costs that may come up throughout the project and are classified within the contract as direct, indirect, markup, or overhead.
• Unit pricing: Unit pricing contracts break down the costs of the project into measurable units. This breakdown is typically done by the tasks or scope of work and the materials needed to complete said tasks.

The type of construction contract that’s the best fit for you will depend on the project, the client, and how you want to be paid for your services. If you want to see a sample construction contract for one of these contract types, a quick Google search for “sample construction contract template” or “free construction contract template” can help you find what you’re looking for.

What Should Be in a Construction Contract?

Regardless of which type of construction contract you choose for your project, there are a few key elements you’ll need to include in your agreement, including:

Identifying/Contact Information

Your construction contract should include identifying and/or contact information for both the contractor and the client.

For the client, this includes name, business name (if applicable), phone number, email address, and the property’s address (residential or commercial) where the construction work will be taking place.

For the contractor, this includes name, business name, phone number, email address, company address, and any relevant license numbers and insurance information.

Title and Description of the Project

Your contract should include a title for your project that reflects the scope of the work. For example, if you’re renovating a bathroom, the title for the contract could be “Bathroom Renovation.”

The construction contract should also describe the scope of the project. For example, if you were writing the contract for the Bathroom Renovation project, your description might look something like this:

The General Contractor will perform bathroom renovation work, including:

• Tear out the existing bathroom, including bathtub, toilet, vanity, and all fixtures
• Remove all floor and shower area tiles
• Re-tile floor and shower

If applicable, your project description should also outline any permits or licenses required to complete the project successfully.

Projected Timeline and Completion Date

You want to be clear on how long you expect to work on the construction project. Ensure the date the contract takes effect, the project start date, and the estimated completion date.

For example:

This Bathroom Renovation Contract (the “Contract”) is effective as of July 1, 2022, by and between Karen Ottway (“General Contractor”), whose address is 1542 Peel Ave., Calgary, AB, A7B 5F3, and James Baldwin (“Owner”) to set forth the terms and conditions agreed to by and between General Contractor and Owner regarding the home improvement work at the Owner’s property located at 463 Jefferson Drive, Calgary, AB, AL2 3T4, beginning August 23, 2022, and ending on or before September 30, 2022.

Your contract should also include clear verbiage on what happens if you can’t complete the work by the projected completion date. For example:

If the work outlined below cannot be completed on the specified date, the General Contractor will communicate expected changes to the date with a minimum of 24 hours notice and offer a new completion date.

Cost Estimate and Payment Schedule

One of the most important things to make clear in your construction contract is your project’s cost estimate and payment schedule.

Before drawing up the contract, you should send your client a cost estimate to ensure you’re on the same page. Then, include that cost estimate in your construction contract along with a payment schedule.

In terms of payment, you should always ask for a non-refundable deposit to start working. For example:

The Owner agrees to pay General Contractor $7,000 plus the cost of materials for completing the Bathroom Renovation project. Upon signing of this Contract, the Owner shall pay General Contractor a non-refundable deposit of $2,000.

Then, you can design a payment schedule based on project milestones. For example:

Phase 2: When tiling is complete, the Owner shall pay General Contractor $2,000.
Phase 3: When all fixtures have been installed, the Owner shall pay General Contractor $1,000.

You’ll also want to include a line about late fees, like:

Upon completion of the Bathroom Renovation project, payment is due for the entire unpaid balance of the Contract Price, less the non-refundable deposit. If the Contract Price is not paid upon completion of the Work pursuant to the term and conditions of this Contract, interest shall accrue at a monthly rate of X percent.

Stop-Work Clause and Stop-Payment Clause

A stop-work clause gives you the legal right to stop the project if the client hasn’t paid you. The stop-payment clause gives the client the right to withhold payment if you don’t hit the established project milestones or don’t do the work at the agreed-upon quality level. For peace of mind, you’ll want to include both clauses.

Act of God Clause

Sometimes, you may run into circumstances that prevent you from completing a project on time that are out of your control. It’s important to account for those circumstances in your construction contract.

An Act of God clause outlines how you and the client will move forward if faced with one of these unforeseeable circumstances, like a hurricane, earthquake, or widespread material shortage. Make sure you account for any and all issues that might arise.

Change Order Agreement

Things may change throughout your project. Your client might even decide they want to expand the scope of the project.

A change order agreement allows for either party to deviate, change or add to the original contract with a written document signed by both parties. Including this agreement will allow you to quickly amend your project scope or the terms of your contract if things change down the line.

Warranty

Your client needs to know that you’ll stand behind the quality of your work. And that if there’s an issue with the quality of the project, you will take responsibility and fix it.

A warranty gives your client that peace of mind by guaranteeing your work for a specific period of time (typically one year). Most clients won’t work with a contractor that doesn’t offer some kind of warranty. So it’s definitely something you’ll want to include in your construction contract.

Dated Signature from Both Parties

Contracts aren’t legally binding unless both parties sign them. So make sure your construction agreement is signed and dated by both yourself and your client.

Construction Contracts Protect Your Business

Having a construction contract helps get you and your client on the same page before moving forward with a construction project. And it helps to protect you if there are any disputes, disagreements, or issues with payment throughout said project. Now that you know what to include in your construction agreement, you have everything you need to add that layer of protection to your next big project.

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This post was updated in November 2021