The Construction Contract Process

Sign up for the PhilX Group newletter

The Construction contract process, just like the design and estimating stage, is extremely important in order to clearly set out what is expected of both parties. As the construction contract should include a firm price as well as the detailed drawings and scope of work for the contract to refer to, it should never be finalized until both the design and estimating stages are complete.

Here I would like to lay out in a simple and easy to follow format, what should the construction contract include to protect both the contractor and the client

  1. Parties Involved – The first section of the contract should clearly state both the full name of the client that the work is being done and paid for as well as the legal name of the contractor under which he is licenced to carry on business. Though some clients will wish to put the contract in their spouse’s or partner’s name, this is not advisable for the contractor. If something happens to their relationship and payment is not made, then the builder has no legal remdy path against the person who may be the one who is footing the bill. To protect the client, it should be checked that the name that is on the construction contract is exactly as the name that the contractor is registerd to carry on business oir else if there is non-performance, this can be a legal technicality that will restrict legal action against the company
  2. General Scope of the Construction Project – This clause will be just to outline generally what the nature of the agreement is. More detailed descriptions will follow
  3. Design and Contract Documents – This section of the construction contract will spell out the details of the project are. It should include such things as the approved construction drawings, specifications, inclusions and exclusions and a schedule of items to be chosen by the client at a later date and how much is budgeted for each by the contractor. This is extremely important because these documents will provide a clear “bible” that will explain exactly what the contractor is supposed to give the client, and what the client expects to get.
  4. Scope of Work – This section will again be more general in nature, but should acknowledge some specifics that are not included in the drawings, such as whether this is a labor only contract or a labor and materials contract.
  5. Price – The construction contract should not only be 100% clear on the price, but also whether it is a fixed sum, or whether the work will be done on a cost+ basis. The latter term refers to an agreement where the builder will submit all costs for the job, then submit those costs for reimbursement from the client, with a pre-arranged mark-up. Unless the construction project involves unknown variables, such as will be seen in a renovation, the preferred structure for a client is usualy a fixed sum.
  6. Payment schedule – This too is one of the most critical clauses in a construction contract and there are several ways to structure this. The most widely used method is to base progress payments on the percentage of work completed, less an equal percentage of the deposit given at the start of the contract. The benefits of this to the builder is that in billing cycles which are heavily weighted with material purchases, he can bill for those that are delivered on site. This helps maintain proper cash-flow. Another method sometimes used is pre-arranged billings based on the contract amount divided by the number of billing cycles the job is expected to last. This method though brings with it risks for both the contractor and the client. If the construction schedule is delayed, the client may pay for more work than is actually done at a specific time,and some builders may then have little incentive to prioritze the project. On the other hand, the contractor could be put in a position where more work is done than paid for by the client, resulting in strains on the company’s cash flow.
  7. Liabilities – In any project there is always liabilities. Some should fall on the builder while others might be placed on the client. As an example, the client should not be responsible to cover increased costs due to manpower issues, financial difficulties of the builder, site accidents or theft. These liabilities should squarely rest on the shoulders of the contractor. In some cases though, new laws may be passed that greatly increase the costs due to minimum wage standards, natural calamities, title issues or delays in payment due to financial issues of the client. These liabilities should not be shouldered by the contractor in most cases.
  8. Changes – In just about any project, there will need to be changes during the course of work. Some of these may be initiated by the client who wants extra work done, and some may be due to errors or omissions by the architect or engineer. In s some other instances, the contractor may have made a mistake. Whichever is the case, there needs to be a clearly outlined path to make these changes in a way that is fair to all parties involved.
  9. Schedule – The construction contract should be very clear on not only what is expected to happen, but also when it is expected. This can be as simpel as a completion date, or with the use of a GANT type chart detailing the schedule of the different stages of the build. Some clients like to secure a penalty clause within the contract, which in some cases is understandable, however it is also only fair then to provide the contractor a bonus if they bring the project in ahead of schedule.

This should give you a basic overview of what should be the minimal requirements for a construction contract, however you may always want to consult an Attorney before signing anything a builder puts in front of you. If they hesitate to providing one, then this might be a red flag that they will be later try to muddy the waters on what is expected of them.

One last thing to remember is that any contract needs to be fair to BOTH parties. If you try to have it your own way, you might get successful to begin with an pat yourself on the back for being a hard negotiator, however you might just find that later in the game you will be left holding the bag with a contractor who cannot reasonably meet the expectations you have paced upon him. There is never a real winner in that scenario.