A construction contract is a legally binding agreement between two parties – usually, the owner of the build and one or more contractors - that is based on policies and conditions recorded in document form. This outlines the scope of work, risks, duties, and legal rights of both parties. Unsurprisingly, the contract between owner and contractors is one of the most important things to agree upon before work commences. Failure to do so could result in a huge range of problems that could stall and delay your project, such as confusion over what work is being completed, who is responsible, and when contractors are getting paid.
Every construction project is different, and the contracts needed can vary significantly. Nevertheless, irrespective of the size or type of your project, there are some key elements that should always be included in your construction contract. These include:
An executed agreement. Until the contract is signed by both parties, any costs that are presented by the contractor should be considered only an estimate.
A definition of the date of commencement. This determines the date from which the project will begin. This can be defined by a number of things, such as a signed agreement or receipt of permits needed. It can also be just a pre-determined date picked from the calendar. For this reason, it is important to identify it and include it in the contract.
A defined duration for the construction project and a preliminary schedule of works. Every project is different and whilst this may change over time, the contractor should be able to provide an estimated duration for the project at the very outset. They will then be required to provide regular updates to this schedule to ensure that the project is running to time. Along with this, a specific Gantt chart style critical path schedule from commencement to completion should be provided.
A defined basis of payment. This is extremely important to ensure that there are no disputes between the parties involved. This part of the contract should establish whether the work is being completed for a lump sum, by milestones or for the cost of the work. In the cost of the work contract, there should always be a stipulated ‘Guaranteed Maximum Price’ or GMP, which specifies a total capped maximum cost. This helps owners to budget their project accordingly. If there is no GMP specified, technically there is no cap, and this could leave the project open to extensive costs!
Determined payment frequency and terms. Following on from the defined basis of payment, the contract should also clearly lay out expectations for how often a contractor can submit billing and the amount of time the owner (and if necessary, the owner’s representative) has to review and provide payment. In addition to this, a clause should be added to ensure that the contractor submits an interim or final lien waiver equal to the amount the contractor is requesting for payment. The amount of retained billings to be withheld from the contractor until the project reaches substantial completion should also be defined.
Definition of the scope of work. This is arguably one of the most important aspects of any construction contract since without a clear definition of the scope of works to be completed, much of the other elements are pointless. The scope of work describes all of the work to be done on the project, who is responsible for completing each element, the techniques that will be used to complete each element and what materials will be used. Clear wording must be used so that there is only one interpretation, as this will minimize the risk of claims and litigation. The scope of work can include drawings, photographs, and other visual elements to provide clarity and prevent confusion.
Detailed breakdown of cost. As its name suggests, this is a very detailed breakdown of the contract amount that specifies individual billings during the construction process. For example, a single line item for an exceptionally high amount labeled ‘site work’ would not be sufficiently detailed to allow the owner to know what is included in that charge. By breaking down individual items, the owner can see exactly where their money is being spent.
Unsurprisingly, construction contracts are very complex. For this reason, it is essential that you hire a construction consultant to help review the contract and clarify any elements which you are unhappy with or unsure about. Their part in this process is invaluable since the contract underpins the expectations for the entire project.
If you would like more information about what needs to be included in construction contracts, please don’t hesitate to get in touch with our expert team.