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A construction contract agreement is a contract between the contractor and property owner that explains the work to be done on a construction project. You need a construction contract agreement to define the responsibilities of each party during a construction project.
You risk project delays, unnecessary expenses, and possible legal actions when a construction contract agreement is not in place.
What Is a Construction Contract Agreement?
A construction contract agreement is a type of contract that details the construction work on a property before it begins.
A solid agreement describes the work performed, including how the project will start, what will be done, how the payment will take place, and how each party will handle problems, defective work, or changes in the project.
Why Do You Need a Construction Contract Agreement?
Not only does a construction contract agreement detail each party’s obligations, but it also helps avoid misunderstandings during the project if the contractor fails to deliver on the project or if the owner does not meet the payment terms agreed upon.
Construction contracts should define how problems, changes, or questions can be properly resolved.
When Do You Use a Construction Contract Agreement?
The construction contract agreement is used when you and the contract are ready to start the project. The agreement is more detailed than the estimate and should explain all the terms and conditions agreed to by the property owner and the contractor, including maintenance aspects (such as waste disposal and safely handling hazardous materials).
The contract documents the contractor’s obligations, fees, and the total price of the construction project.
Frequently Asked Questions
What Are Liquidated Damages?
A liquidated damages clause requires the contractor to pay the owner a set amount each day that the construction is delayed or runs over the completion date. A liquidated damages clause is difficult to uphold in court because the owner must be able to show their damages were both extensive and too uncertain to determine in advance.
How to Schedule Payments on a Construction Contractor Agreement?
How you schedule payments for your construction project depends on the payment schedule format the parties agree upon.
Here are the most common options:
- deposit and final payment
- progress payment
- time-based payment
- milestone-based payment
- completion-based payment
Who Has the Greatest Risk in a Lump Sum Contract?
A lump sum contract presents more risk to the contractor, as it’s based on a fixed price arrangement that leaves little room for adjustments. As such, contractors have to correctly estimate the contract price in a lump sum contract in order to avoid future losses.
How to Write a Construction Contract Agreement
Whether you write your own or use an online construction contract template, you should have a legal contract reviewer go over your construction contract agreement before signing, in order to make sure that it’s compliant with applicable laws.
Construction contract agreements are legally binding documents, and if there is a dispute later, the court will look at the contract agreement itself for what the parties intended.
1. Add the Identifying Information
- Contact information for both parties
- Project address — if different from the contact address
- The contractor’s license number
2. Describe the Project and Timeline
- Project title, such as “Living Room Remodel”
- Each step within the project, such as “Remove carpet”
Each step must have an estimated time to complete, and the project as a whole must include starting and completion dates. If the project requires a new construction, it’s best to consult the architect, designer, or project manager involved in the construction work in order to have an accurate representation of the timeline.
3. Provide Cost Estimates
Use the descriptions and timelines to create estimates for the contract price as well as the unit price for each section. There should be separate estimates for labor, materials, fees, building permit, indirect costs, and any other expenses. You should also consider the pricing arrangement: lump sum (or fixed price) or unit price.
At this point, you can also consider the payment terms—whether to be paid at the time of completion or through progress payments—and the reimbursement methods for the costs incurred during construction.
4. Consider Restrictive Clauses
These can include:
- “Force majeure” clauses — what happens if there is a natural disaster or other circumstances that are beyond the contractor’s control
- Dispute resolution clauses — whether disputes will be solved through arbitration, mediation, or in court
- Stop-work/stop-payment clauses — what to do if work is not done on time or the services provided are defective
5. Include a Certificate of Completion
This section is needed to certify the project and list the responsibilities and obligations. The contractor will sign and date when the project is complete and the property is returned to the property owner.
6. Add Signatures
As with any other documents, both the property owner and the general contractor must sign and date.