A case in point is the Burj Khalifa in the United Arab Emirates, considered the world’s tallest building at a staggering height of over 828 meters or 2,717 feet. These architectural wonders cannot be complete without workers, architects, and engineers working together to achieve such feat. Nowadays, there are parameters and boundaries for constructing various structures guarded by particular laws. Construction contract agreements prove to be helpful when assembling buildings, no matter how big or small they are. Learn more about these contract agreements, including their definition, composition, and components, by reading the article. Aside from that, there is a series of frequently asked questions provided below.

What Is a Construction Contract Agreement?

A construction contract agreement is a document that details the terms of a construction project. It classifies the work plan of a structure that the involved parties must show adherence. The agreement is between a contractor that operates the construction plan and the client that employs them to do the essential work. These contracts also indicate the right of the contractor to hire subcontractors if and when it is necessary. Construction contract agreements have various types, and it is up to the employer or the client to select according to the development outcome they are aiming for from the beginning. The agreement identifies and explains the work to be done, including the start and end dates, labor costs, materials, and communication relating to the construction project. It is a necessary document for the client and the contractor because it holds and outlines the scope of work, dangers, responsibilities, and legal provisions of both parties.

According to the data about the construction sector provided by the United States Bureau of Labor Statistics, the workforce statistics relating to employment for June 2021 has a preliminary estimate of 7,410 individuals. Most workers connected to the construction sector points to construction laborers, amounting to 827,100 employees during 2020.

Types of a Construction Contract Agreement

Understanding the various types of construction contract agreements is essential to any person wanting to engage in a project. It determines what you pay, the liabilities, and other aspects of the job. The different types of construction contract agreements can have variations depending on the project needs, with tweaks depending on the product or the construction plan. Below are the four common types of construction contracts.

Lump-sum contract: The lump-sum contract is also known as the fixed price agreement or stipulated sum contract. It involves a total fixed price for all construction-related activities. This type includes incentives or benefits for early termination, including penalties, referred to as liquidated damages in cases of late termination. The lump-sum contract is extremely common in the construction business, and more often than not, general contractors use this kind of contract. The utilization of this type of contract happens when the venture is transferred to the contractor because the owner wants to avoid enforcing changes for undefined work. An experienced contractor is essential in creating this type of contract to guarantee an accurate estimate of cost prices involved in the construction project. Using lump sum for the construction contract agreement simplifies the bidding process and allows a profit return when finishing under-budget projects. The downside of these contracts, however, is that they destroy profit margins. The chances of losing profit in larger projects tend to be a greater risk too. It is also worth noting that lump-sum contracts are advantageous if there is a definite scope and a fixed schedule agreed upon by both parties and smaller projects.Cost-plus contracts: Otherwise known as cost-reimbursement contracts, involves the client paying for the costs incurred by the contractor during the project along with a particular sum for value. The profitable sum comes from a percentage calculation of the total price of the entire project. These contracts must have specific and detailed numbers for direct costs, indirect costs, and profit. Direct costs refer to direct labor and used materials, while indirect costs often include office space, travel expenses, and communication fees. Using cost-plus contracts is advantageous because these types of agreements are very flexible. After all, clients can make changes along the way, with contractors benefiting from the necessary adjustments. Any miscalculations aren’t as detrimental especially relating to bids compared to lump-sum contracts. The disadvantage of these contracts falls on the difficulty of justifying costs. Market prices often fluctuate, and estimates of expenses prove challenging for contractors, as well as reimbursing indirect costs is also a problem for some. Cost-plus contracts are ideal when the project does not have a definite scope, with the owner accountable for limiting the price billing for the contractor. In these types of contracts, the client is the one taking risks instead of the contractor. It is also worth noting that cost-plus needs plenty of supervision to become effective.Time and material contracts: The time and material contract work best with a project that does not have a clear scope of work opposing lump-sum agreements. The client and the contractor establishes an hourly or daily rate, including the additional costs arising within the term of the construction project. The incurred expenses of the time and material contract must clearly be defined and classified as direct, indirect, mark up, and overhead. Owners can also establish a specific project completion date that the contractor must meet for a lower risk of losses. These contracts are best for smaller scopes of work or a realistic computation of the project’s longevity. Time and material contracts are very agile, relating to reimbursing material costs and worker wages due to unexpected delays or challenges along the way. These contracts also allow easy negotiations between the contractor and the client about settling material costs and worker pay. On the other hand, tracking the consumed time and materials can be challenging because it requires an accurate material list and price list. It means that the contractor will spend more time ensuring that everything on the log is correct and genuine. It is also worth detailing that efficiency of workers is not compensated since the agreement terms only pay according to a daily or hourly rate. Despite this, bonuses are given to the contractor when completing work before the fixed schedule.Unit pricing contracts: Federal agencies and builders are the entities commonly using these types of agreements. Identifying the unit prices during the bidding process is done by the two parties, and it is during the method that the client requests specific quantities and pricing for a pre-established amount per item-unit. These contracts are also known as measurement contracts, measure and pay contracts, or remeasurement contracts. Unit price contract agreements are convenient for projects wherein work is repetitive and heavily dependent on material costs. Using unit pricing contracts helps simplify the process of invoicing because it allows for transparency and, in the long run, helps prevent disputes between the contractor and the client. The profit margin also stays the same despite the extra work or scope changes, making it easier for both parties to reach an agreement and make the necessary order adjustments. The prime risk of using this type of contract falls with the client because they must reimburse unexpected unit costs added into the agreement. However, the transparency provided by accurate invoicing methods counters the risk of this happening.

Parts of a Construction Contract Agreement

Depending on the project plan, each contract varies from one another. The only modification concerns the scope of work, costs, and other essentials depending on the nature of the job. However, each construction contract agreement must have the following components to protect both parties.

Project description: The projects description details the project’s essential ideas or problem description that the contract must address within the contract period. It can be in a paragraph or a detailed list.Contract price: It details the type of contract price agreed upon by the parties with other possible deductions or additions to the contract and the process of releasing these amounts. Remember that the values must always go through negotiations and agreements to prevent misunderstandings that lead to legal disputes.Payment basis: It describes the money to be paid by the client to the contractor, whether it is on a daily, weekly, or monthly basis. It must also define the percentage of money retention when it comes to payment applications. The due dates, penalty fees, accrued interests, invoice terms, and other payment concerns must be discussed and explained. Schedule or calendar: The project schedule or calendar must include the working days agreed upon by the contractor and the client, along with its division process. It must also make it clear if the basis of the agreement is on business or calendar days through the use of a Gantt chart, bar chart, or any other helpful method.Document list: It lists down all the essential construction contract documents is made available in this section. It includes drawings, floor plans, exhibits, specifics, and other supplementary conditions that aid in completing the construction project.Construction scope: The construction scope indicates the measurable or quantifiable outcomes of the project and a detailed description of all necessary construction activities during the term of the project. Conditions and responsibilities: It emphasizes the duties of both parties to achieve the construction plan within the agreed schedule, including the responsibility of providing documents, information, payments, and other deliverables. It must hold precise terms of appropriate liens, penalties, withholding, andĀ arbitrationĀ rules. It must also reflect detailed instructions in processing claims and solving disputes.Contract laws: Relevant and applicable legal requirements, like governing laws, lien requirements, arbitration procedures, insurances, completion requirements, and liquidated damages, are present. It can also detail termination processes, work suspensions, and other agreements relating to the contractor.

How to Create a Construction Contract Agreement

Various construction contract agreements must cater to different clients depending on the scope of work a client intends to happen. In most states, it is mandatory to have a written contract in place. Here are helpful steps in creating a construction contract agreement.

Step 1: Describe the Type of Work to Be Accomplished

State the exact description of the work you have to accomplish as a contractor. It must detail the materials, tools, or equipment you intend to use during the duration of the contract. It is advantageous to be as specific and comprehensive as possible.

Step 2: Include All Necessary Financing Details

Ensure that you indicate the agreed amount that you and the client agreed upon during negotiations for the pay they intend to give for the work you put in to achieve project completion. State the contract price, non-refundable security deposit, payment schedules, final payment price and date, and interest payments to aid the understanding of the client.

Step 3: Indicate the Due Dates and Necessary Fees

Always be clear about your intended payment installment dates. If you agreed on charging late fees, the contract agreement must detail the amount and date the client must pay these charges. Also, explain how you plan to handle the expected costs. Whether you shoulder the expenses or the other party pays for the increase. It is also necessary to outline how the parties intend to handle the addition and deduction processes in the contract.

Step 4: Describe the Handling Process of Adjustments

Indicate terms and provisions that protect you from unnecessary and unexpected work requests from your client and any additional costs. There must be a section that affirms an understanding of change orders and claims.

Step 5: Agree On the Means of Resolving Disputes

Select an ideal discussion or authority to resolve disputes and claims regarding your work performance or completion. It is also helpful to include stipulations that require resolutions in terms of binding negotiations. In doing so, both parties are waiving their rights to file lawsuits, but it helps to arbitrate disputes faster, privately, and inexpensively.

Step 6: Identify Coverage Information

Indicate that it is your responsibility to provide liability insurance and worker compensation for the length of the construction project as required by law. It is also essential to state your licensing information and offers the owner the right to ask for a performance and payout bond.

FAQs

When do you need to use a construction contract agreement?

A construction contract agreement is necessary for building, renovating, or altering a building or structure. Both parties must have an agreement in writing that acts as a roadmap until the completion of the construction project. It also allows the parties to designate essential roles that include obtaining permits, providing materials, buying fixtures, and paying for utilities. The construction process involves plenty of moving mechanisms that define each party’s responsibility to complete the project.

What are the consequences of not using a construction contract agreement?

The success of a construction project or construction plan depends on clearly defined expectations and schedules. Mistakes and delays affect both parties negatively, resulting in additional costs for labor and equipment because the property is left unused in the intended time and purpose. A construction contract agreement holds a liquidation damages clause that indicates a set amount that the contractor must pay to the client for each delay per day. The document also prevents issues like poor performance, work changes, early termination, lost profits, and imbalanced risk allocations for both parties.

How can construction contract agreements protect a contractor’s business?

Having a well-written and comprehensive construction contract agreement helps get you and your client on the same page with the desired construction outcome. It helps protect you from any legal disputes, disagreements, issues about payments, and other relating concerns. It is necessary to have all the essential provisions and clauses for the extra layer of protection you and your company need to complete the project and move on to the next one.

Having a construction business can be challenging if you do not have the sufficient knowledge and tools to smooth out transactions with your clients. As there are various types of construction contracts available, you must know which one to use, depending on the type of project the client aims to achieve. You must also know the necessary clauses, provisions, or statements that help protect you and your client throughout the project. It is also advantageous to know the steps in creating a comprehensive contract to avoid misunderstanding between you and your client. In the words of Theodore Roosevelt, “It is not often that a man can make opportunities for himself. But he can put himself in such shape that when or if the opportunities come he is ready.”. Be prepared for your future construction projects by familiarizing yourself with the construction contract agreement samples above, ready for use and download.