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17 May, 2024
The construction industry is a big world with a lot of different projects, varying in size and complexity, each requiring careful planning and execution to ensure they are completed successfully and on time. With a plan in place and a construction cost estimate completed, a contract needs to be drawn up - a legally binding agreement that outlines the terms and conditions of the project.
Nothing is certain until that contract is signed. But what are the different types of construction contracts you might need to put in place?
To help you speed things up and have clarity on what has been agreed upon, here’s a comprehensive guide to construction contracts. In this post, you’ll learn about everything that needs to be included in a contract, the best places to find examples, the overall contract types, and more.
What Are the Key Types of Construction Contracts?
While the tiny variations of a contract are limitless. There are a few general construction contract types that you will most likely need at some point, either as a construction professional or if you’re on the receiving end of the service. Here are the most important ones:
1. Fixed-Price Contracts:
Often referred to as lump sum” contracts. This is where contractors agree to complete well-defined smaller projects for a fixed price, providing cost certainty for owners.
2. Cost-Plus Construction Contracts:
Suited for complex or large projects, clients pay actual costs plus a predetermined fee. This type of contract is beneficial when projects aren’t fully defined yet. The client and the contractor must be aligned on the terms and conditions of the project and that unexpected costs can occur. Communication and collaboration is therefore critical.
3. Time and Material Contract:
Ideal for uncertain projects, this is where clients pay for labor hours, material costs, and a contractor's markup, offering flexibility but risking cost overruns. This type of contract is suitable for the contractor when dealing with customers who initially don’t understand the cost implications of their decisions.
4. Unit Price Contract:
Used for repetitive work where contractors are paid per unit of completed tasks, ensuring cost transparency and control. It can also be used when the project’s scope is difficult to nail down prior to taking place. A Unit Price Contract divides and prices distinct parts of the entire project into quantifiable “units”, instead of a fixed price for the entire project.
5. Design-Build Contracts:
One entity handles both design and construction, streamlining the process for fast-track projects, saving both time and money.
6. Construction Management Contracts:
Owners hire a construction manager as their representative to oversee large, complex projects, responsible for scheduling, budgeting, and quality control. This type of contract is often used when the client lacks the expertise to manage the project themselves.
7. Joint Ventures:
Multiple contractors collaborate for expertise and resources on large-scale projects.
8. Guaranteed Maximum Price Contracts:
Often described as GMP contracts, here contractors promise not to exceed a specified maximum price, which will be the billable amount. Contractors pay actual costs or extra costs if they exceed the agreed-upon GMP, providing cost control and risk-sharing. These contracts ensure reimbursement for expenses above the agreed-upon price, enhancing transparency and trust between the parties involved.
9. Incentive construction contracts:
As it says on the tin, a contract that offers financial rewards to contractors for achieving specific performance goals or project aims.
Know the Difference: Building Contracts vs. General Contractor Contracts
To those not in the industry, a building contract and a general contractor contract may sound the exact same.
Spoiler: they are very different.
The key difference is project completion vs project management. A building contract usually refers to a contract between a contractor and the client, where the contractor is directly responsible for the construction of a building or structure.
On the other hand, a general contractor contract is often used when a general contractor is hired to oversee and manage a project that involves multiple subcontractors. This means that the general contractor takes on the role of coordinating all aspects of the project.
The key difference between these two types of contracts is the level of responsibility. In a building contract, the contractor is primarily responsible for the construction work, while in a general contractor contract, the general contractor is responsible for managing the entire project.
What Should be Included in a Standard Construction Agreement?
A standard construction agreement can have a number of clauses, which we’ll cover in the next section, but there are fundamental provisions that a well-crafted agreement contains. In the table below you will find some of these provisions and clauses. If you’re unsure of what to include, consider having a legal professional put together the contract for you.
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Contractor name & contact information |
Contractor’s license number, along with their phone number, email address, and company address. |
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Client name & contact information |
Aside from the client's phone number and email address, provide the property address where the work will be carried out and confirm the client's ownership of the property. |
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Attachments |
Usually consists of plans, layouts, and other specifications required for the project. |
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Project cost |
Specify the direct costs, overhead costs, and project expenses associated with the completed project. Determine whether the homeowner will make the payments in multiple installments or a single down payment at the beginning. If installment payments are agreed upon, specify the scheduled payment dates and required amounts. |
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Client failing to secure financing |
If the client does not succeed in securing financing, describe how the contract can be terminated. |
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Work description & date of completion |
Clearly define the scope of the project and provide the date of completion (either exact or estimated) to ensure both parties are on the same page. |
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The right to halt the project |
This clause is necessary if you have not received the required payment. Additionally, it includes provisions that describe how either side may end the contract. |
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The right to retain funds |
The client has the right to refuse to pay if the conducted work is not meeting quality standards. |
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How to solve breach of contract |
The (legal) consequences if the agreed-upon terms and conditions are violated. The breach can be anything from late payments or more serious violations such as failure to deliver promised work. |
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Examination and access |
This permits the owner to inspect the property during appropriate times, and for the contractor to have unlimited access to the property. |
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Change orders |
Decide on how deviations from the well-defined scope of the project will be handled. |
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Warranties |
A representation that the contractor makes which the client can and will rely on. |
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Subcontractor no liens clause |
The primary contractor must make certain that their agreements with the subcontractors clearly outline their responsibility in case subcontractors fail to fulfil their obligations. |
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Disposition of all materials and terms upon completion |
Agreement to get rid of spare and unsafe materials, and leave the property & worked area in clean condition. |
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Damages quantification and liability restriction |
Both parties can reach a mutual agreement regarding compensation for delays in performance or unforeseen issues. |
Key Elements To Cover In Your Contract
No matter what type of construction agreement you’ve settled on, some key things should always end up in your standard construction contract. The key elements should help manage customer expectations, set clear plans and guidelines, and establish the scope of work.
Perfect Planning
Outlining a clear plan with objectives and milestones in the contract is essential. With a construction scheduling software you can easily plan and allocate your resources in advance. A project plan should include a detailed project description, outlining plans, specifications, permits, and approvals, as well as a clear scope of work specifying the contractor's responsibilities.
Project Details
Along with the general plan, you’ll need to include all the key project details such as payment terms, and procedures for managing scope changes, as well as detailing insurance and liability responsibilities in case of accidents or damages.
Why You Need Essential Clauses
Alongside the key information needed in the contract, there are quite a few essential clauses you should be looking to include in any construction contract. These clauses mostly help protect you legally and financially in unforeseen or irregular circumstances.
- A Force Majeure Clause outlines what happens in the event of unforeseeable circumstances, such as natural disasters or other events beyond the control of either party.
- A Liquidated Damages Clause specifies the amount of damages the contractor must pay if they fail to meet project deadlines.
- A Termination for Convenience allows the owner to terminate the contract for any reason, even if the contractor is not in default.
- A Dispute Resolution Clause outlines the process for resolving disputes, including mediation, arbitration, or litigation.
- An Indemnification Clause specifies how responsibility for legal expenses and damages will be allocated in case of disputes or claims.
- A Safety and Compliance Clause ensures the contractor complies with all safety regulations and industry standards.
Where To Find Construction Contract Examples
Starting from scratch when writing a contract can be extremely difficult. So, If you're in need of a construction contract as a reference, here are some great places to get started with:
- Industry Associations: Many construction industry associations provide sample contracts and contract templates to their members. Here’s a list of industry associations across different regions:
- Example of Industry Associations in the US
- Example of Industry Associations in the UK
- Build UK
- Construction Industry Council
- National Federation of Builders
- Example of Industry Associations in Sweden
- Byggföretagen
- Byggnads
- Example of Industry Associations in Finland
- RALA
- The Finnish Construction Trade Union (Rakennusliitto)
- Rakennusteollisuus RT
- Legal Resources: Legal websites and publications often provide sample construction contracts - websites such as LegalZoom, Rocket Lawyer, and LawDepot are useful.
- Construction Attorneys: Consulting with a construction attorney can provide you with customized contracts tailored to your specific project.
- Government Agencies: In some cases, government agencies may provide standard contracts for public projects.
- Community Help: Local builders' exchanges and online forums can provide contract templates and guidance, but be cautious and verify their legality and suitability for your situation.
How A Good Construction Contract Addresses Risks and Disputes
Construction contracts are essential roadmaps for construction projects. They help prevent misunderstandings and disputes by clearly defining the project's scope, outlining how changes to the plan will be handled, setting the rules for payments, and making sure everyone knows who's responsible if accidents or damages occur. These contracts also provide crucial insights into profit margins and establish the project owner's responsibilities, helping to manage labor costs and the cost of materials effectively.
They also include ways to resolve disputes quickly without going to court, like mediation or arbitration. Some contracts even require performance bonds to guarantee that the contractor fulfils their promises, providing an extra layer of security and ensuring the final cost aligns with expectations.
Having a perfect contract drawn up and ready not only helps your efficiency but is also a great way of securing clients when construction bidding, setting you up for success as you can go to clients contract-in-hand. With Buildbite, you can streamline the construction process, maximize cost savings, and ensure transparent project management.
Whether it’s gathering the information needed to create the best contract, running construction projects smoothly and hitting contract guidelines, or creating estimates for your project plan, using Buildbite is a new way to manage construction projects. An app that makes documentation easy, communication simple and clear, and project management completely transparent. Download the app and see how Buildbite enhances your ability to create ideal contracts for your future projects.
