How to Make a Construction Contract Agreement?

Every construction contractor must have faced some challenges starting from sending estimates to invoices and even after that.

Articulating a construction contract is as difficult as constructing a house. But since you are an expert in the latter part, leave the former part to us. This article is on how to write a construction contract agreement; from its importance to different types and factors to consider to let you know the authorized person who writes the construction contract.

What is a Construction Contract and Why is it Important?

A construction contract is a legally binding document containing every piece of information related to construction either from scratch or by modifying the existing one. Both owner and construction contractor sign this document giving mutual consent.

The construction contract compiles of a certain set of things:

• Work to be done
• Start and completion of the project
• Parties to be involved in constructing
• Labor and material costing
• Communication channel
• Amendments in the project
• Dispute resolving clause

Now that you know what a construction contract is, let’s know the importance of having one before initiating construction work.

Having a duly signed construction contract on your side means a sense of guarantee, meaning, you are secured and so are your customers.

In nutshell, the construction contract is a guarantee that you, as a contractor, have to complete the work/project, and in return, you would be compensated in a stipulated period.

Since the construction contract is a significant document, you must know how to create one. Knowing this piece of information would make your work easier when actually trying to create one.

How to Make a Construction Contract?

Like every other contract, this one also involves several laws. That’s one of the reasons you need a construction lawyer with years of experience in creating and making a document legally binding. You can even reuse the draft for future projects. Besides, if you learn how to become an construction estimator, then it would be a cherry on the cake.

Some essential steps to consider while writing a construction contractor:

Step 1: Purpose of contract

You must write the purpose of the contract. For instance, if house-building is the purpose, you must explicitly mention it. Apart from this, it should also include the parties involved, project location, inception, and completion of the project date.

Step 2: Add elements

We have discussed different elements to be included in a home-making contract. Other than this, you must include a timeline of the project, payment structure, and insurance details.

Step 3: Add clauses

What you should not miss when creating a construction contractor is the list of 5 different clauses:

• Payment terms clause
• Contract sum amount
• Terms related to handling changes in the contract
• Dispute resolving clause
• Claim resolving clause

All these clauses are crucial and important. Also, they are considered to protect the interest of contractors.

Step 4: Get a second opinion

You must include an expert with the knowledge of local, state, and federal law. This way, your construction contractor would be error-free.

Apart from this, let’s know how to write a construction contract:

• Start from the top of the contract paper where you need to mention the title, date, and time. Along with that, there should be a company name and logo written in bold letters. In this part, you need to mention details of the project like the location and type of job.
• Following that, make another section to add financial & insurance information, the project timeline, and the insurance coverage policy.
• During the formation of the agreement, there should be a clause that is suitable for your project work. We recommend you contact an attorney to pick the correct clause for your project. It will include potential uncertainty like natural calamities and severability.
• Thereafter, mention the necessary rules and laws in your contract. Adding such things will give a professional tone to your construction contract. Also, it means that you are considering all the local laws and state guidelines.
• Once you are done with the necessary information in the contract, send it to the expert to recheck if you missed out any points. Also, you can ask your attorney to have a close look at the agreement.

What Are the Different Types of Construction Contracts?

1. Lump-sum contracts

A fixed fee is agreed upon for the entire construction project in these fixed-price contractual arrangements. There are no bifurcations for different costs. The fees of the general contractor are also included in the project amount. The contractor, therefore, tries to keep the expenses tight so as to extract maximum profits. Thee are several other money-making strategies in the construction business to bag a good amount of profits.

2. Cost-plus contract

This arrangement encompasses proper segregation of the cost of materials used and labor utilized in the construction process. The plus part denotes the commercial construction profit margin to the general contractor, which could be flat fee or percentage of the contract price.

3. Unit pricing contracts

These contracts are agreed to negotiate prices of different items, hourly payment rates, or space-wise cost break-up. The price of every unit is defined and paid for as per the agreement.

4. Time and materials contract

Such contractual agreements have some defined heads under which the payments are reimbursed or paid for by the owner. These heads are direct, indirect, overhead, and mark-up. An hourly rate is also defined for the contractor, which implies that they won’t be entirely responsible for the supervision and will check for only those parts that are assigned to them.

5. Guaranteed maximum price contract

Such contracts specify a threshold up to which the owner will bear the project costs to control unmanageable expenses associated with the project. The general contractor shall pay for any expenditure over and above the defined threshold.

6. Custom contracts

If the parties involved do not intend to have a standard A101 contract for their association and instead want to get a custom-built contract for the undertaking, they can do so by discussing all the necessary pointers with a freelance writer who knows legal clauses, like a paralegal.

The construction contract, once drafted, will then be reviewed and verified by an attorney and signed by both parties to bring it into force. The standard clauses will not be applicable to these construction contracts unless a clause has expressly been stated in these contracts.

There are standard formats for the construction contracts which have all the clauses that such an agreement usually needs as per the contract types discussed above. The construction contract template could be used as is, or it can be used as a base structure to examine and use an updated contract with amended clauses.

What Should a Construction Contract Include?

Here are a few key elements that a construction contract should include:

• The details of the property like name and contact information should be mentioned at the top of the contract. Also add other details such as email id, phone number of the owner, complete address of the property, or company address if it’s a commercial property, the size of the property, description of geography or prior construction, financial liabilities associated with the property and any other information which could be relevant to the legal implications on the land.
• The details of the contractor regarding their license number and contact information such as email id, phone number, professional insurance liability, experience, and company detail should be described. The insurance coverage shall include the worker’s compensation insurance as the construction contractor is responsible for paying the labor engaged in construction. The general liability is in the context of any discrepancies arising out of the construction contract agreement.
• The property owners usually choose a particular general contractor for the efficiency of work promised by them and the track record that they have had. Since there’s a lot of money and effort involved in the new construction, there should be a pre-defined completion date, which must be religiously followed. The project cost for construction should also be premeditated and agreed upon to avoid legal action thereon.
• There should be a brief description of the project being handed over to the construction contractor to have just a preliminary vision of the project. This will give an idea of the project on which the entire discussion and the detailing are based. Otherwise, the perception of certain specifications could be misaligned from the actual portrayal of the intended solid construction contract agreement.

The steps mentioned above cover the preamble of the construction agreement to clearly define the essential information and the premise of the contract or agreement. You should know that the contract is not enforceable unless these details are incorporated and the counterparties sign the construction contract duly dated.

The points described below pertain to the rights and obligations of the parties involved in the construction contract so as to free the project from any ambiguity.

• Since there are chances of dereliction, the contractor should secure a non-refundable deposit from the owner of the property before beginning the construction work. This way, the interest of the contractor is protected without having to follow up with the customer for payment.
• There should be a detailed description with an appropriate title for the project’s scope of services of construction. The contractor payment terms of the project should also be clearly outlined for the work pursuant to completion of construction. There could be a monthly rate decided for services provided, or the same could be bifurcated in phases of completion.
• The parties’ legal rights should be explicitly mentioned in the contract for informational purposes, to have recourse in situations of liquidated damages, stop work, non-refundable deposit, and late fees.
• The clause to withhold payment is critical to ascertain that the construction work turns out as planned. There should be legal action for the deviation in work from what had been decided, either in quality, the scope of work, time limit, or the total cost.
• To simultaneously protect the construction contractor, there is also a right to lien on materials that the contractor can exercise if the entire unpaid balance is impossible to proceed with the unit price of construction projects.
• The stop-work clause helps both the property owner and a general contractor by allowing a mechanism to exit the contractual agreement for construction if there are discrepancies from the other party’s end in complying with the contract.
• The general contractor will be responsible for the main task of ensuring the work goes as planned and getting together a team of people. It will be in your hands to complete the project work and provide a warranty for hazardous things during the work.
• Since there is a lot of reliance on the work of sub-contractors and other experts, the general contractor usually handles the ultimate responsibility for performing the contractor agreement in the best spirit. This hand-over of responsibility takes a chunk of trouble off of the owner’s head.
• A God clause is an unavoidable clause for unexpected situations that may arise during the course of a construction project that renders the contractor incapable of completing the contract.

This course of action should be defined for certain natural or legal hindrances, although it’s unlikely that all the probable situations will be covered through sheer foresight. This leaves scope for legal advice and mutual arbitration for settling the work completed and proceeding with the remaining work.

Who Writes Construction Contracts?

Articulating a construction contract involves two to three different parties, such as the main engineer, business owner, and contract lawyer (if both are the same person).

Once the construction contract is written, it is sent to all the parties involved in different phases for evaluation and then it is signed and documented.

Whenever you decide to write a construction contract, make sure you hire a professional lawyer who is well-versed with local and state construction-related laws, rules, and regulations.

So that’s how you will write a construction contract considering the points of all the parties. If you still have doubts, questions, or queries, you can reach out to us via email. We have still tried answering a few questions below.

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Conclusion

So, now you know how construction contracts protect the rights of the contracting parties by trusting in legal advice. The clauses covered in the agreement will have the potential to rise in the course of the construction of the project.

The attorneys will provide legal advice to safeguard the interests of both the parties, while also enforcing the clauses of the construction contract as binding.

The construction contract agreement is fundamental in ensuring work performance on the agreed completion date. The contract agreement builds pressure on the contractual parties to avoid being dubious and let the working sail smoothly through time and space.

This is how construction contract documentation plays a significant role for both parties. Besides the contract agreement, you should also give equal importance to making estimates and invoices. Let an invoice app for contractors that reduce your workload, sign up with InvoiceOwl to create estimates and invoices in less than a minute!