How to Make a Construction Contract Agreement?

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A construction contract is an agreement between the property owner and the contractor to make alterations/reparations on the structure, for a specified amount and in a pre-defined timeline.

As a professional contractor, you would need construction contract documents that are relevant to the contract’s clauses and act as memoranda of understanding in cases of dispute on the quality of work done or the correct execution of specifications. Managing people from different professions and ensuring everyone does their job well can be an arduous task.

Dispute resolution is more straightforward if there is a written agreement that outlines the duties and responsibilities of all the people involved. So, the project description should be as detailed as possible, with all the relevant documents attached.

What is a Construction Contract Agreement?

The contract agreement is a legal paper that says the hiring party and the contractor are mutually agreed to start project work. It outlines the rules and laws defined by the state administration, which should be agreed upon by both parties.

Also, the contract agreement indicates the scope of project work, right to the general contractor and their responsibilities along with the set deadline. Such construction contracts can be of different types depending on the cost and requirement of the project.

Let’s check out the types of construction contracts in the next section.

Types of Construction Contracts

6 Types of construction contracts

  1. Lump-Sum Contracts

    A fixed fee is agreed upon for the entire construction project in these fixed-price contractual arrangements. There are no bifurcations for different costs. The fees of the general contractor are also included in the project amount. The contractor, therefore, tries to keep the expenses tight so as to extract maximum profits.

  2. Cost-Plus Contract

    This arrangement encompasses proper segregation of costs of materials used and labor utilized in the construction process. The plus part denotes the mark-up for profit from the construction to the general contractor, which could be a flat fee or a percentage of the contract price.

  3. Unit Pricing Contracts

    These contracts are agreed to negotiate prices of different items, hourly payment rates, or space-wise cost break-up. The price of every unit is defined and paid for as per the agreement.

  4. Time and Materials Contract

    Such contractual agreements have some defined heads under which the payments are reimbursed or paid for by the owner. These heads are direct, indirect, mark-up and overhead. An hourly rate is also defined for the contractor, which implies that they won’t be entirely responsible for the supervision and will check for only those parts that are assigned to them.

  5. Guaranteed Maximum Price Contract

    Such contracts specify a threshold up to which the owner will bear the project costs to control unmanageable expenses associated with the project. The general contractor shall pay for any expenditure over and above the defined threshold.

  6. Custom Contracts

    If the parties involved do not intend to have a standard A101 contract for their association and instead want to get a custom-built contract for the undertaking, they can do so by discussing all the necessary pointers with a freelance writer who knows legal clauses, like a paralegal.

    The construction contract, once drafted, will then be reviewed and verified by an attorney and signed by both parties to bring it into force. The standard clauses will not be applicable on these construction contracts unless a clause has expressly been stated in these contracts.

    There are standard formats for the construction contracts which have all the standard clauses that such an agreement usually needs as per the contract types discussed above. The construction contract template could be used as is, or it can be used as a base structure to examine and use an updated contract with amended clauses.

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Things That Should Necessarily be Part of the Construction Contract

  • The details of the property like name and contact information should be mentioned at the top of the contract. Also add other details such as email id, phone number of the owner, complete address of the property, or company address if it’s a commercial property, the size of the property, description of geography or prior construction, financial liabilities associated with the property and any other information which could be relevant to the legal implications on the land.
  • The details of the contractor regarding their license number and contact information such as email id, phone number, professional insurance liability, experience, and company detail should be described. The insurance coverage shall include the workman’s compensation as the construction contractor is responsible for paying the labor engaged in construction. The general liability is in the context of any of the discrepancies arising out of the construction contract agreement.
  • The property owners usually choose a particular general contractor for the efficiency of work promised by them and the track record that they have had. Since there’s a lot of money and effort involved in the new construction, there should be a pre-defined completion date, which must be religiously followed. The project cost for construction should also be premeditated and agreed upon to avoid legal action thereon.
  • There should be a brief description of the project being handed over to the construction contractor to have just a preliminary vision of the project. This will give an idea of the project on which the entire discussion and the detailing are based. Otherwise, the perception of certain specifications could be misaligned from the actual portrayal of the intended construction contract agreement.

The steps mentioned above cover the preamble of the construction agreement to clearly define the essential information and premise of the contract agreement. You should know that a contract is not enforceable unless these details are incorporated and the counterparties sign the construction contract duly dated.

The points described below pertain to the rights and obligations of the parties involved in the construction contract so as to free the project from any ambiguity.

  • Firstly, the contractor should secure a non-refundable deposit from the property owner to kickstart the construction work and protect their interests in case there is dereliction in the payment schedule by the owner as per the agreement of the project completion.
  • There should be a detailed description with an appropriate title for the scope of services of construction. The contractor payment terms of the project should also be clearly outlined for the work pursuant to completion of construction. There could be a monthly rate decided for services provided, or the same could be bifurcated in phases of completion.
  • The parties’ legal rights should be explicitly mentioned in the contract for informational purposes, to have recourse in situations of liquidated damages, stop work, non-refundable deposit, and late fees.
  • The clause to withhold payment is critical to ascertain that the construction work turns out as planned. There should be legal action for the deviation in work from what had been decided, either in quality, the scope of work, time limit, or the total cost.
  • To simultaneously protect the construction contractor, there is also a right to lien on materials that the contractor can exercise if the entire unpaid balance is impossible to proceed with the unit price of construction projects.
  • The stop-work clause helps both the property owner and a general contractor by allowing a mechanism to exit the contractual agreement for construction if there are discrepancies from the other party’s end in complying with the contract.
  • The general contractor will be responsible for the main task of ensuring the work goes as planned and getting together a team of people. It will be in your hands to complete the entire project work and provide a warranty for hazardous things during the work.
  • Since there is a lot of reliance on the work of sub-contractors and other experts, the general contractor usually handles the ultimate responsibility for performing the contract agreement in the best spirit. This hand-over of responsibility takes a chunk of trouble off of the owner’s head.
  • A God clause is an unavoidable clause for unexpected situations that may arise during the course of a construction project that renders the contractor incapable of completing the contract.

This course of action should be defined for certain natural or legal hindrances, although it’s unlikely that all the probable situations will be covered through sheer foresight. This leaves scope for legal advice and mutual arbitration for settling the work completed and proceeding with the remaining work.

5 Steps To Make Construction Contract Agreement

  1. Start from the top of the contract paper where you need to mention the title, date, and time. Along with that, there should be a company name and logo written in bold letters. In this part, you need to mention details of the project like the location, and type of job.
  2. Following that, make another section to add financial information, project timeline, and insurance coverage policy.
  3. During the formation of the agreement, there should be a clause that is suitable for your project work. We recommend you contact an attorney to pick the correct clause for your project. It will include potential uncertainty like natural calamities and severability.
  4. Thereafter, mention the necessary rules and laws in your contract. Adding such things will give a professional tone to your construction contract. Also, it means that you are considering all the local laws and state guidelines.
  5. Once you are done with the necessary information in the contract, send it to the expert to recheck if you missed out any points. Also, you can ask your attorney to have a close look at the agreement.
Frequently Asked Questions
  1. What is a severability clause in a construction contract agreement?

    The severability clause preserves the other provisions of a construction contract agreement as a whole when one of the clauses needs to be severed or is non-viable for performance due to some unavoidable circumstance. The remaining clauses and treatment of those remain unchanged, barring only the severed one.

  2. What do you mean by a successor and assigned clause in a construction contract agreement?

    When the construction work is supposed to be done in a calamity-prone area, where some foreseeable obstructions may hamper the project. In such cases, this clause will help the contractor to define their successors and assign the remaining job work to someone else. The assigned person will then take over the remaining work at the earliest.

  3. Who licenses the construction contractor for taking up a construction contract?

    The state boards authorize the license for the contractors to begin their work. The property owner should ensure whether a general contractor has a legitimate permit for taking up the construction assignment or not. Once authorized by the local administration, the contractor needs to follow their policies.

Final Thoughts

So, now you know how construction contracts protect the rights of the contracting parties by trusting in legal advice. The clauses covered in the agreement will have the potential to rise in the course of the construction of the project.

The attorneys will provide legal advice to safeguard the interests of both the parties involved while also enforcing the clauses of the construction contract as binding.

The construction contract agreement is fundamental in ensuring work performance on the agreed completion date. The contract agreement builds pressure on the contractual parties to avoid being dubious and let the working sail smoothly through time and space.

This is how construction contract documentation plays a significant role for both parties. Besides the contract agreement, you should also give equal importance to making estimates and invoices. Let an automated software reduce your workload, to create estimates and invoices in less than a minute!

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Author Bio
Jeel Patel
Jeel Patel

Jeel Patel is the Founder of InvoiceOwl and is the main curator & writer of the content found on this site. With ideals of quality, commitment, and perseverance, he believes in creating lasting business relationships with the clients.


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