Tips For Drafting A Solid Construction Contract Agreement

Content

• What is a construction contract?
• Different types of construction contracts
• Lump sum contract
• Cost-plus contract
• Time and materials contract
• Unit pricing contract
• What are the best practices for drafting construction contracts?
• Understanding the project scope and requirements
• Establishing clear terms and conditions
• Addressing potential risks and disputes
• Ensuring legal compliance
• Including essential contract clauses
• Conclusion

Construction at any scale involves countless tasks, stakeholders, and specifications. Given the inevitable complications, a detailed agreement outlining work throughout the project is necessary to keep everyone on the same page. From time and materials required to duration, defining and agreeing on these beforehand allows businesses and contractors to collaborate successfully without disputes in the future. Here’s all you need to know about drafting a top-notch construction agreement.

What is a construction contract?

A construction contract is a legally binding agreement between property owners and contractors. The document outlines the terms and conditions under which the parties will exchange construction services for compensation. 

These contracts enable parties to communicate their expectations and requirements before starting the project. Thus, there’s a lesser chance of miscommunication and disagreements during the contractual relationship. It also allows businesses to address the risks of relying on external parties.

Construction agreements usually include terms defining project scope, material requirements, timeline, payment conditions, milestones, and dispute resolution mechanisms. There’s no standard construction contract suitable for all intents and purposes. Organizations can use the following types, depending on their needs, scope, and complexity.

Different types of construction contracts

One of the most important things to determine before starting a construction project is the type of contract governing the owner-contractor relationship. These differ in terms of budgets, schedules, stakeholders, and scope, which necessitates the creation of unique construction contracts.  

1. Lump sum contract

A lump sum contract, also known as a fixed price contract, is a popular choice for construction projects where the scope of work is well-defined. The contractor agrees to complete the project for a predetermined fixed price in these agreements. They provide owners with cost certainty and minimize the risk of cost overruns. However, the contractor assumes the risk of unforeseen expenses or changes in the project scope.

2. Cost-plus contract

A cost-plus agreement commits the owner to pay the contractor back for all legitimate expenses spent on the project and an additional profit margin. This type of contract provides transparency, as the owner has visibility into the actual project costs. However, it can lead to conflicts of interest if the contractor increases costs to maximize profit.

3. Time and materials contract

It is a flexible option where the contractor is paid based on the time spent on the project and the materials used. This type of contract is suitable for projects with uncertain or evolving scopes, as it allows for adjustments along the way. However, it can be challenging to control costs and timelines, as there is no fixed price for the project.

4. Unit pricing contract

It bases the price of a good or service on the quantity or unit bought. Instead of a fixed price for the entire project, the price is calculated per unit, such as per hour, per item, per cubic yard, etc. They allow for better cost control as the price correlates to the quantity of work or products delivered. It helps businesses plan their budgets more effectively and avoid unexpected costs.

What are the best practices for drafting construction contracts?

Construction contracts outline the responsibilities and rights of all the involved parties. They lay the foundation for a successful and smooth project completion. Businesses risk disagreements, delays, and financial loss if they do not create agreements that safeguard their interests. Owing to their importance, here’s how organizations can draft competent construction contracts.

1. Understanding the project scope and requirements

Detailed description of the project

The first step in drafting a construction contract is defining the project scope and requirements. It includes details such as the type of construction, the size of the project, the timeline, and any specific requirements or preferences the client may have. Businesses can ensure that the contract accurately reflects the needs of both parties by having a thorough understanding of these aspects. This description should outline the work, the materials, and any specifications vital to the project. Including this information in the contract helps prevent misunderstandings and ensures that both parties are on the same page.

Roles and responsibilities

Another crucial aspect of drafting a construction contract is clearly defining the roles and responsibilities of each party involved in the project. Construction projects involve countless stakeholders; ambiguous guidelines can cause mismanagement and accountability issues. It includes outlining the duties of the contractor, subcontractors, suppliers, and any other parties involved in the project. Businesses can guarantee that all parties know their expectations and prevent confusion by defining these roles and responsibilities.

2. Establishing clear terms and conditions

Construction contracts must establish clear and concise terms and conditions. It includes outlining the scope of work, the responsibilities of each party, and any specific requirements or specifications for the project. By clearly defining these terms, both parties can ensure they are on the same page and minimize the risk of misunderstandings or disputes down the line.

Payment schedule and terms

It helps to avoid financial issues between parties. They must specify when and how payments will be made, including any milestones or benchmarks that trigger payment. By setting out a clear payment schedule, both parties can ensure that the project stays on track financially and avoid any payment-related issues.

Project timeline and milestones

A well-defined project timeline is essential for keeping the construction project on schedule. The contract should outline milestones and deadlines for each project phase, ensuring that both parties recognize the timeline and can work towards completing the project on time. By setting clear milestones, the project can stay on track and avoid delays that could impact the overall timeline.

3. Addressing potential risks and disputes

Risks and disputes are part and parcel of contractual relationships. Businesses must make every effort in advance to minimize any obstacles or disputes that might emerge throughout the construction project. The concerned parties can divide the risks fairly and legally by including particular clauses. 

Indemnification and liability

Indemnification clauses are provisions in a construction contract that allocate responsibility for certain risks or liabilities between the parties involved. These clauses typically require one party to compensate the other for losses, damages, or liabilities arising from specified events or circumstances. By including well-crafted indemnification clauses and limitations of liability in construction contracts, parties can protect themselves from unforeseen risks and disputes that may arise during the project. Construction projects are inherently risky. Exemption clauses help mitigate risks by clearly defining the liabilities and responsibilities of each party. They protect contractors and subcontractors from excessive claims that could jeopardize their financial stability.

Dispute resolution mechanisms

Disagreements are almost inevitable in construction projects due to the complexities and multiple parties. Construction contracts should include clear and enforceable dispute resolution mechanisms to address disputes and avoid costly litigation. These mechanisms may include provisions for mediation, arbitration, or litigation, depending on the parties’ preferences. It helps to minimize disruptions to the project and maintain positive working relationships.

4. Ensuring legal compliance

Establishing legal compliance among all the involved parties is crucial for the success and sustainability of any project. There are multiple factors to consider while drafting construction contracts, from industrial standards to environmental regulations.

Licenses and permits

Construction projects require the necessary licenses and permits. It ensures the parties comply with local, state, and federal regulations. Non-compliance may lead to costly fines, delays, or project termination. Verifying that all parties to a construction contract have the necessary licenses and permits is essential. It includes contractors, subcontractors, and other professionals working on the project. Confirming this information upfront can prevent legal issues down the line.

5. Including essential contract clauses

Construction contracts should include essential clauses that cover vital elements of the project. These clauses provide clarity and guidance on various aspects of the construction process, helping to minimize risks and uncertainties. The contractor and the client can avoid misunderstandings or disputes regarding the project requirements.

Termination clause

A termination clause outlines the circumstances under which either party can end the contract. This clause is essential as it provides a clear understanding of the rights and responsibilities of each party in the event of a contract termination. It can include reasons for termination, notice periods, and any applicable penalties or remedies. By including a termination clause in a construction contract, both parties can prevent misunderstandings and disputes.

Warranty and guarantee provisions

It outlines the contractor’s responsibilities regarding the quality and materials used in the construction project. These provisions typically include the duration of the warranty, the scope of coverage, and any conditions or limitations. It protects the project owner’s interests and ensures parties address defects or issues promptly and effectively.

Conclusion

The final step in drafting a solid construction contract is to conduct a thorough review. Businesses must ensure all terms and conditions are comprehensive, fair, and legally binding. They can employ legal professionals to review the contract to identify potential issues or loopholes that may put either party at risk.

They can ascertain that the contract clearly outlines the scope of work, including timelines, deliverables, and responsibilities. Moreover, add clauses to address milestones, payment schedules, and dispute resolution mechanisms to resolve conflicts likely during the project.

Once the legal review is complete, the next step is to seek client approval. It is essential to ensure that the client thoroughly understands and agrees to the terms outlined in the contract before moving forward. Only then, after legal and client approval, should the construction contract get to the signing stage. 

Thankfully, it is now simpler than ever to draft sound construction contracts. Dock 365 contract management software offers diverse tools within a single platform to streamline every stage of the contract lifecycle.

Pre-approved templates: Draft any construction contract, from T&M to unit agreements, within seconds.

Clause library: A selection of essential clauses like confidentiality, termination, and indemnification to mitigate risks and protect the interests of all parties.

Automated workflows: Accelerate legal and client reviews by routing contracts through pre-defined workflows to get to relevant stakeholders.

Timely reminders: The construction industry has executory contracts with ongoing obligations. Automated notifications for terms, payments, and milestones allow businesses to easily manage performance and compliance.

E-signature solutions: Easily get contractors to sign construction contracts with Adobe Sign, DocuSign, and Sertifi.

Dock also includes advanced features that allow businesses to manage their contracts easily. Schedule a demo today to learn all about it!