How to Make a Construction Contract Agreement?

Every construction contractor faces challenges, from sending estimates to collecting final payment. Articulating a construction contract is as difficult as constructing a house. But since you are an expert in the latter part, leave the former part to us. This article is on how to write a construction contract agreement; from its importance to different types and factors to consider, so you know exactly what goes into a contract and who should write it.

What is a Construction Contract and Why is it Important?

A construction contract is a legally binding document containing every piece of information related to construction, either from scratch or by modifying an existing structure. Both the owner and the construction contractor sign this document, giving mutual consent. A construction contract covers a certain set of things:

• Work to be done
• Start and completion dates of the project
• Parties involved in the construction
• Labor and material costs
• Communication channel
• How changes to the project will be handled (change orders)
• Dispute resolution clause

Now that you know what a construction contract is, let's look at the importance of having one before initiating construction work.

For instance, if you haven't signed a construction contract, there are chances of your customer delaying payments or making excuses. Not getting timely payments would financially disturb your business.

The contract also protects you from unpaid extra work: your customer can't demand work beyond what the contract states. Whatever is stated in the contract, you have to do only that much work — anything extra gets documented and priced in a change order before you do it.

In a nutshell, the construction contract is a guarantee that you, as a contractor, have to complete the work/project, and in return, you would be compensated in a stipulated period.

Since the construction contract is a significant document, you must know how to create one. Knowing this piece of information would make your work easier when actually trying to create one.

How to Make a Construction Contract?

Like every other contract, this one also involves several laws. That's one of the reasons you need a construction lawyer with years of experience in creating and making a document legally binding. You can even reuse the draft for future projects. Besides, if you learn how to become a construction estimator, then it would be a cherry on the cake.

Some essential steps to consider while writing a construction contract:

What Are the Different 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. Accurate bidding matters most under this type, because any cost overrun comes out of your margin.

2. Cost-plus contract

This arrangement encompasses proper segregation of the cost of materials used and labor utilized in the construction process. The plus part denotes the commercial construction profit margin 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, overhead, and mark-up. 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 do not want to use a standard industry form (such as the AIA A101 owner–contractor agreement), they can have a custom contract drafted for the project instead. The custom draft is prepared around the pointers both parties agree on, then reviewed and verified by an attorney and signed by both parties to bring it into force. Keep in mind that the standard clauses from industry forms apply to a custom contract only if they are expressly written into it. Many contractors use a standard construction contract template as a base structure and have an attorney amend the clauses to fit the project.

What Should a Construction Contract Include?

Here are a few key elements that a construction contract should include:

Property and Owner Details

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.

Contractor Information and Credentials

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 worker's compensation insurance as the construction contractor is responsible for paying the labor engaged in construction. The general liability is in the context of any discrepancies arising out of the construction contract agreement. Not sure what coverage costs? See our guide to contractor insurance cost.

Project Timeline and Cost

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.

Project Description

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 solid construction contract agreement.

The steps mentioned above cover the preamble of the construction agreement to clearly define the essential information and the premise of the contract or agreement. Make sure these details are incorporated and the contract is duly signed and dated by both parties — missing or vague terms are what turn small disagreements into legal disputes.

Rights and Obligations of Parties

Additional Protective Measures

• To simultaneously protect the construction contractor, there is also a right to lien — a mechanic's lien lets the contractor make a claim against the property if the balance owed for labor and materials goes unpaid. Lien rules and deadlines vary by state, so verify the process with your state before relying on it.
• 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 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 in the best spirit. This hand-over of responsibility takes a chunk of trouble off of the owner's head.
• A force majeure ("act of God") clause is an unavoidable clause for unexpected situations that may arise during the course of a construction project that render 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.

Who Writes Construction Contracts?

Articulating a construction contract usually involves two to three different parties, such as the main engineer, the business owner, and a contract lawyer.

Once the construction contract is written, it is sent to all the parties involved in different phases for evaluation, and then it is signed and documented. Many contractors now collect signatures digitally with an e-signature tool, which speeds up approval and leaves a clear record of who signed and when.

So that's how you will write a construction contract considering the points of all the parties. 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 lets the work 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. An estimate is not a contract by itself, so a clear written agreement matters all the more. Let an invoice app for contractors reduce your workload.