January 16, 2023 Bret Gregor Maidre

Everything to Know About a Construction Contract (2023 Official Guide)

Writing a construction contract is an important step in any building project. It’s essential to ensure that everyone involved knows their roles and responsibilities, as well as the timeline of completion. A written agreement helps prevent misunderstandings or conflicts by setting clear expectations for all parties. But how do you write such a contract? What should be included? And who should sign off on it?

These are all questions we will answer here today! We’ll provide insight into what exactly goes into writing a construction contract and offer tips for drafting one that best serves your needs.

 

Table of Contents

What is a Construction Contract?

Types of Construction Contracts

  1. Lump Sum Contracts
  2. Cost-Plus Contracts
  3. Unit Price Contracts
  4. Time and Materials
  5. Guaranteed Maximum Price

Why Do You Need a Construction Contract?

What Should Be Included in a Construction Contract?

How to Draft a Construction Contract?

Construction Contract Template

Who Should Sign the Construction Contract?

What Happens if There Is a Breach of Contract?

Frequently Asked Questions

  1. What is the difference between a contract and a proposal?
  2. What is the difference between a construction contract and a building contract?
  3. What is a subcontractor clause?
  4. What is the most important thing to remember when writing a contract?

The Secret Ingredient

 

What is a Construction Contract?

A construction contract sets out the scope of work, payment details, timeline, and important information related to the project.

The contract should include all relevant information, such as who will be responsible for what tasks during the project, how much each party will be paid for their services when payments are due, and any special requirements needed to complete the job. The contract should specify any warranties or guarantees that may apply to materials used in the construction process.

 

Types of Construction Contracts

Construction contracts are a vital part of any construction project. They define the scope of work, payment terms, and other important details that both parties must agree upon before work can begin. Several types of construction contracts are available to builders and developers, depending on their needs. Knowing the contracts available can help ensure your construction projects are completed on time and within budget.

 

1.    Lump Sum Contracts

A lump sum contract is a construction agreement in which the contractor agrees to complete all work for a fixed price. This means that no matter how much time or materials are needed, the contractor cannot ask for more money from the client. It also means that both parties must agree upon any changes made during the project before taking effect.

Lump sum contracts are often used when there is an exact scope of work and can be accurately estimated beforehand. This allows both parties to agree on a single price without worrying about additional costs. The contractor typically provides an itemized list of services, materials, and associated prices, so clients know what they’re paying for upfront.

 

Advantages

The main advantage of this type of contract is that it allows both parties to agree on an exact cost before any work begins. This helps eliminate potential disputes over costs later and reduces financial risk for both sides. It also provides predictability when budgeting, allowing contractors to plan their finances more accurately.

 

Disadvantages

One disadvantage of lump sum contracts is that they can be difficult to estimate correctly at the start due to unforeseen circumstances or problems that may arise during construction. Suppose changes need to be made during construction. In that case, these will likely incur additional costs, which could end up being higher than originally estimated by either party – resulting in disagreements over who should pay for them. Sometimes, a contractor underestimates their costs and loses money on a project because they have agreed upon a fixed price beforehand without considering any unexpected expenses or delays.

 

2.    Cost-Plus Contracts

Cost-plus contracts are construction contracts that reimburse costs incurred during the project and a set amount of profit. This type of contract is often used when there is uncertainty about the cost and scope of work to be completed. It gives both parties more flexibility in budgeting and planning for the project.

Under this type of agreement, contractors are paid based on their actual costs plus an agreed-upon percentage or fixed fee for overhead and profit. The contractor must provide detailed documentation showing all expenses associated with the job before they can receive payment from the owner. The owner also has some control over how much money is spent by setting limits on certain items, such as materials or labor hours.

 

Advantages

One advantage of Cost-Plus Contracts is that they give contractors more control over their budgeting since they are only required to pay for actual costs incurred during the project. These contracts can help protect against unexpected increases in material or labor costs by allowing contractors to pass on those extra charges directly to clients instead of having them eat into profits. It assures clients that projects will be completed within a certain timeframe without going over budget due to unforeseen circumstances.

 

Disadvantages

The main disadvantage associated with Cost-Plus Contracts is that there may be less incentive for contractors to keep costs down if they know they will receive an additional fee regardless. These contracts require extensive record-keeping for both parties involved (contractor and client) to ensure accuracy throughout the project, which could lead to delays or disputes if records are incomplete or inaccurate at any point in time. Finally, depending on how much money has been allocated towards overhead fees upfront, it could limit funds available later in case unexpected issues arise during construction resulting in higher-than-expected overall costs being passed onto clients at the completion stage.

 

3.    Unit Price Contracts

Unit Price Contracts are construction contracts used to determine the cost of materials and labor for a project. This type of contract sets out the unit price for each item or service, such as the cost per square foot of concrete or hour for electricians. The total cost is multiplied by the unit price by the quantity needed.

Unit Price Contracts can be beneficial in certain circumstances, particularly when there is uncertainty about how much material will be required or how long it will take to complete a job. They also provide flexibility, allowing changes to be made during construction without renegotiating an entire contract.

 

Advantages

One advantage of using unit price contracts is that they provide more flexibility than other types, such as lump sum contracts. With unit price contracts, builders can adjust their budget according to material price changes or labor costs without renegotiating the agreement. They also allow for easier tracking and monitoring since each item has its own cost. It makes identifying discrepancies between estimated and actual costs easier, which can help reduce waste and improve efficiency overall.

 

Disadvantages

While Unit Price Contracts have many benefits, they also come with some drawbacks. For example, suppose unforeseen conditions arise that require additional materials or services not included in the original agreement. In that case, extra costs may need to be negotiated after work has begun, which could lead to delays and increased expenses for both parties involved. These contracts often lack detailed specifications. There may be ambiguity around what exactly needs to be done which could result in misunderstandings leading to further issues between contractor and client.

 

4.    Time and Materials

Time and materials contracts are construction contracts based on the time it takes to complete a project and the materials’ cost. This type of contract allows for flexibility in budgeting and scheduling since no fixed price or timeline is associated with the project.

Under this agreement, contractors typically bill their clients separately for labor and material costs. Labor costs are usually calculated by multiplying an hourly rate by the hours worked. Materials are billed at their current market value plus applicable taxes or fees. The total cost is divided between labor and materials to determine each party’s share.

Subcontractors may also be involved in time and materials contracts if they provide specialized services that cannot be provided by the primary contractor alone. In these cases, subcontractors will typically charge their rates for labor and mark up prices for any necessary supplies or equipment needed to complete their portion of the work on the project.

 

Advantages

The main advantage of using Time and Materials contracts is that they allow contractors to accurately estimate costs based on actual time spent working on projects rather than making estimates based on the hours or materials needed. This can help reduce overall costs since contractors only pay for what they use instead of overestimating the resources needed, which could lead to overspending. This type of contract also gives clients more flexibility since changes can be made during work without needing approval from all parties involved for them to take effect.

 

Disadvantages

Time and materials contracts can have several disadvantages for the contractor and the client. One major disadvantage is that the client may face uncertainty regarding project costs and budgeting, as the contractor’s expenses and labor hours are not fixed and can change during the project. The contractor may face challenges in tracking and managing expenses and labor hours, which can be cumbersome. Furthermore, the lack of clear boundaries in terms of labor hours and expenses can lead to a lack of motivation for efficient work among the contractor’s laborers. The client may also risk cost overruns if the contractor cannot efficiently manage their labor hours.

 

5.    Guaranteed Maximum Price

A Guaranteed Maximum Price (GMP) is an agreement between the owner and contractor that sets a maximum price for the project, regardless of any additional costs incurred during its completion. The GMP also outlines how those costs will be shared between the two parties.

The guaranteed maximum price ensures that the builder will not exceed the budget and provides a reliable estimate of the total cost for a construction project.

 

Advantages

One of the primary advantages of a GMP contract is that it helps to reduce financial risk for both parties. The contractor agrees to complete the project within a certain price, and the owner knows how much they will pay for the completed work. This eliminates any surprises or unexpected costs that may arise during construction. Additionally, since all costs are known upfront, budgeting and planning become easier for both parties involved in the project.

Another advantage of GMP contracts is that they incentivize contractors to complete projects on time and under budget. Since contractors are guaranteed a set amount regardless of actual costs incurred, they have the incentive to find ways to save money while still delivering quality results on schedule. This can be beneficial not only financially but also in terms of customer satisfaction as well as long-term relationships between owners and contractors.

 

Disadvantages

It’s important to note that while GMPs provide some protection against unexpected costs, they do not cover everything. To avoid potential issues, it is essential to thoroughly review contracts before signing them off on behalf of either party involved. Contractors should ensure sufficient insurance coverage before beginning projects involving guaranteed maximum prices.

 

Why Do You Need a Construction Contract?

It serves as a legally binding agreement between the two parties involved in the project, outlining their roles and responsibilities, as well as any potential risks associated with it.

The primary purpose of a construction contract is to protect both parties from potential disputes or misunderstandings during the course of a project. The contract should clearly define each party’s rights and obligations, including who will be responsible for providing materials, labor costs, insurance coverage, payment schedules, and other details related to completing the job successfully. This helps avoid costly delays due to miscommunication or disagreements between contractors and clients over expectations or timelines.

An up-to-date written record of your contractual agreements provides peace of mind knowing you have legal protection if either side fails to fulfill their end of the bargain according to agreed-upon terms outlined in your contract documents. Without this important safeguard in place, you could find yourself facing costly litigation down the line, which could easily derail even your most successful projects before completion.

 

What Should Be Included in a Construction Contract?

It should include all relevant information about the project, such as the scope of work, timeline, payment details, insurance requirements, dispute resolution process, and other special provisions.

 

Scope of Work

This section should detail what type of work will be done on the project, including materials and labor required. The scope should also specify who is responsible for each task associated with the job.

 

Timeline

A timeline that states when certain tasks must be completed or payments are due should be included. This helps ensure that everyone involved in the project understands their obligations and can plan accordingly.

 

Payment Details

Payment details should clearly state how much money will need to be paid for each completion stage or at specific milestones throughout the project’s duration. This includes specifying if there are any additional fees or penalties for late payments or missed deadlines.

 

Insurance Requirements

All parties involved in a construction contract must have adequate insurance coverage to protect against potential risks associated with building projects, such as property damage or personal injury claims from workers onsite. Insurance requirements may vary depending on local laws, so checking these before signing any contracts is important.

 

Dispute Resolution Process

Disputes between contractors and clients can arise during construction projects, so it’s important to have an agreed-upon dispute resolution process outlined in your contract beforehand. This could involve mediation services provided by an independent third party or arbitration proceedings conducted through legal channels if necessary.

Special provisions can include anything not covered under standard clauses within your contract, such as indemnification agreements protecting one party from liability related to another’s actions during a job site visit. These provisions must also adhere to applicable construction contract laws to remain valid and enforceable.

A construction contract should include the following:

  • The project details.
  • The responsibilities and obligations of both parties.
  • Payment terms.
  • Any other relevant information.

Knowing how to draft a construction contract is essential for protecting all involved.

 

How to Draft a Construction Contract?

When drafting a construction contract, it’s important to be clear and concise. Start by outlining the project details, including the scope of work, timeline for completion, materials needed, payment terms, and any other pertinent information. Make sure that both parties are in agreement with all terms before signing.

 

Outline Party Responsibilities

Next, outline the responsibilities of each party involved in the project. This should include who is responsible for obtaining permits or inspections if necessary and who will provide labor and materials for the job. It’s also important to specify what happens if either party fails to fulfill their obligations under the contract.

 

Include Dispute Resolution and Liability Protection Provisions

Including dispute resolution and liability protection provisions will add security in case something goes wrong during or after construction is completed. This can help protect both parties from costly legal battles down the line should an issue arise related to performance or payment issues associated with a project gone awry.

 

Signature Page

Finally, you must create a signature page where all parties involved can sign off on the agreement once they have thoroughly read its contents and agree upon its terms without reservation or hesitation. Doing so helps ensure everyone understands their rights and obligations under this legally binding document before committing themselves fully to such an arrangement.

A construction contract is a legally binding document that outlines the responsibilities of all parties involved in a construction project. It’s important to draft an accurate and comprehensive contract to ensure everyone understands their roles and obligations.

 

Construction Contract Template

If you don’t feel comfortable writing out an entire custom-made contract from scratch, plenty of pre-made templates are available online, which can provide helpful guidance when creating one yourself. Many even come with instructions, making them easy to use immediately without having to do much research beforehand either. Remember that while these templates might save some time, they must be tailored specifically to fit your needs before being finalized and signed by both parties involved (which could require additional effort).

Bauwise offers the perfect solution for builders and developers. You can create, store, and manage all your contracts from one central location. Save hours of time and actively compare contracts with project budgets.

 

Who Should Sign the Construction Contract?

The parties involved in a construction project should sign the contract once they have agreed on all terms and conditions. Before signing, each party must read the document thoroughly to ensure everyone understands their obligations and rights. The primary parties who should sign the contract are:

 

  1. The Owner

This is typically an individual or company that has hired a contractor to complete work on their property. They will be responsible for providing payment to the contractor upon completion of the job and any other expenses, such as materials or subcontractors.

 

  1. The Contractor

This is usually an individual or company the owner has hired to perform specific tasks related to construction projects. They are responsible for completing all work according to specifications outlined in the contract and ensuring that all safety regulations are met during its execution.

 

  1. Subcontractors

Any subcontractors working on a project must also sign the contract with both parties mentioned above. These individuals or companies may be performing specialized tasks such as electrical wiring, plumbing installation, etc., so they must clearly understand their responsibilities before beginning site work.

 

  1. Witnesses/Notary Publics

Depending on local laws and regulations, witnesses may need to be present when signing contracts between two parties (especially if one cannot physically attend). In some cases, having a notary’s public witness signatures can help protect against potential legal disputes by verifying the identities of those involved in signing documents like this one.

Everyone involved in a construction project must sign off on its terms and conditions before starting any work. Failure to do so could lead to costly disputes later down the line, which could delay progress significantly and cost more money than expected initially.

Ensuring that all parties involved in the construction project are properly identified and agree to the contract terms before signing is important.

 

What Happens if There Is a Breach of Contract?

A breach of contract occurs when one party fails to fulfill its obligations as outlined in the agreement. This can be a minor infraction, such as failing to deliver materials on time, or a major violation, such as not paying for services rendered. In either case, all parties must understand what happens if there is a breach of contract and how they can protect themselves from potential legal action.

 

Determine the Consequences

The first step in determining the consequences of a breach of contract is to review the language used in the agreement. The terms should clearly outline any remedies available for non-performance or other breaches by either party. If this language does not exist, state law may guide how damages are determined and collected.

 

Monetary Damages May Be Awarded

In some cases, monetary damages may be awarded to compensate for losses suffered due to the breach of contract. These damages could include lost profits or additional costs incurred because of delays caused by the breaching party’s failure to perform their duties under the agreement. Additionally, punitive damages may be sought if it can be proven that willful misconduct occurred during negotiations or performance under the contract. Specific

 

Performance Required

Another remedy available for breach of contracts is specific performance – an order requiring one party to fulfill its contractual obligations despite having breached them previously. This type of relief typically applies when money cannot adequately compensate for losses suffered due to non-performance and serves as an incentive for both parties involved in future agreements involving similar circumstances and expectations regarding performance standards and timelines set forth within those agreements.

 

Canceling the Project

Rescission (or cancellation) is another option available when dealing with breaches of contracts; this allows both parties involved in an agreement to cancel out any rights granted under the said agreement without further obligation from either side once it has been determined that one side failed substantially to comply with its contractual duties or otherwise acted wrongfully against another contracting partner’s interests while performing under said agreement.

If a breach of contract occurs, both parties must take steps to remedy the situation. It is important to understand the consequences that may arise and how they can be resolved to avoid any future issues.

 

Frequently Asked Questions

 

  1. What is the difference between a contract and a proposal?

A contract is a legally binding agreement between two parties, while a proposal is an offer to agree. A contract typically includes details such as the terms and conditions, performance requirements, payment amounts, and other specifics related to the agreement. Contracts are often used in business transactions to protect both parties involved in the transaction from any potential risks or losses associated with it.

A proposal is an offer made by one party to another for consideration. It outlines specific details about what will be provided by one party in exchange for something else from the other party. A proposal can also include information on how much money will be exchanged and when payments should be made. Unlike contracts, proposals do not create legally binding obligations until they are accepted by both parties involved.

 

  1. What is the difference between a construction contract and a building contract?

Construction and building contracts are two types of agreements used in the construction industry. A construction contract is an agreement between a contractor and a client to build or remodel a structure, while a building contract is an agreement between two parties to sell or purchase real estate.

A construction contract outlines the details of the project, including materials, labor costs, timeline, payment terms, and other requirements related to the job. It also includes provisions for resolving disputes should they arise during work. Under this agreement, the contractor typically provides design consultation, material procurement, and installation services. Examples include residential homebuilding projects or commercial office buildings.

Building contracts involve buying or selling property rather than constructing it from scratch. These documents outline all aspects of the ownership transfer, such as title searches, financing options, and closing costs associated with purchasing real estate. They may also include clauses regarding maintenance responsibilities after the sale transaction, like who will pay for repairs if something breaks down in future years due to wear and tear on the property over time. Examples include land purchases for development purposes or existing homes sold by one party to another interested in owning them outright without any further modifications needed before occupancy begins (i.e. no renovation required).

 

  1. What is a subcontractor clause?

A subcontractor clause is a legal document that outlines the terms and conditions of a contract between two parties. It typically involves an agreement between a contractor (the party hiring the subcontractor) and the subcontractor (the party being hired). The clause outlines both parties’ responsibilities, including payment amounts, deadlines, the scope of work, insurance requirements, and other important details.

 

  1. What is the most important thing to remember when writing a contract?

When writing a contract, it is important to remember that the document should be clear and concise. All parties involved in the agreement must understand what they agree to and how any potential disputes will be handled. It is also essential to include all relevant information, such as payment terms, deadlines, and any other details that may affect the outcome of the agreement.

 

The Secret Ingredient

Now that you know how to write a construction contract, what do you need to continue to produce successful contracts and grow your business? Bauwise is the secret ingredient for thousands of builders and developers when it comes to successful construction management. With its comprehensive suite of features, Bauwise offers a powerful and easy-to-use platform for builders and developers nationwide.

Bauwise helps you manage all your construction contracts and track your financials in one place. You can easily manage budgets, project costs, labor expenses, and other related items. The software provides real-time analytics so that you can make informed decisions quickly, and it integrates seamlessly with different accounting systems.

Try Bauwise for free.