The ins and outs of creating an airtight construction contract.
When you’re about to embark on a construction project, you want to make sure that you and your client are on the same page. And the best way to get on the same page—both from a project and a legal standpoint? Drawing up a construction contract.
A construction contract lays out the details and expectations of a project to make sure everyone is in agreement before the work starts.
But why are contracts so important? What are the different types? And what do you need to include in your construction contract? Here’s everything you need to know before you get started on your next construction project.
What’s a Construction Contract—and Why Is It Important?
First things first. Before we dive too deep into construction contracts, let’s take a moment to define what, exactly it is. And why it’s so important.
A construction contract is a legal document that outlines, in detail, the parameters of a construction project. The contents of the agreement will depend on the type of project and the type of client. For example, your contractor agreement for a residential client would typically look different from a contract for a commercial client. Regardless of the project or client, it’s important to have a concrete contract in place from the beginning.
Having a legal construction agreement in place offers a layer of protection to both the contractor and the client.
Concrete contracts help to protect both your business and your client over the course of the project. Without that contract in place, you can run into issues if either party has a dispute.
For example, without contract documents that outline the scope of the project, you might run into a situation where a client insists on additional construction services to the project—without paying for those additional services. Or let’s say you’re struggling to collect payment from a client. if you don’t have a construction contract that clearly outlines your payment schedule, your client can argue that they don’t have to pay you by any specific date—which can wreak havoc on your business finances.
The point is, construction contracts will help get you and your client on the same page—and even if, for whatever reason, you don’t stay on the same page, those contracts will help ensure that both you and the client follow through on the terms of your contractor agreement.
What Are the Four Types of Construction Contracts?
There are a variety of ways to structure a contract. But generally, a construction contract will fall into one of the following four categories:
- Lump Sum/Fixed Price. This type of contract rolls the costs of the entire project into a single lump sum or fixed price (hence the name). While there may be added incentives for finishing before the stated completion date (or penalties for finishing later), the client will only be responsible for paying the set price outlined in the contract.
- Cost Plus. A cost plus contract requires the client to pay for all the costs associated with the project, including labor and materials. The client will also pay an additional fee (which could be a fixed fee or a percentage of the total project costs) to cover the contractor’s overhead and profit.
- Time and Materials. A time and materials contract sets an hourly or a daily rate for the contractor. In addition, clients agree to pay for any additional costs that may come up over the course of the project, and are classified within the contract as direct, indirect, markup or overhead.
- Unit Pricing. Unit pricing contracts break down the costs of the project into measurable units. This breakdown is typically done by the type of tasks or scope of work, and the materials needed to complete said tasks.
The type of construction contract that’s the best fit for you will depend on the project, the client and how you want to be paid for your services. If you want to see a sample construction contract for one of these contract types, a quick Google search for “sample construction contract template” or “free construction contract template” can help you find what you’re looking for.
What Should Be in a Construction Contract?
Regardless of which type of construction contract you choose for your project, there are a few key elements you’ll need to include in your agreement, including:
Your construction contract should include identifying and/or contact information for both the contractor and the client.
For the client, this includes name, business name (if applicable), phone number, email address and the address of the property (residential or commercial) where the construction work will be taking place.
For the contractor, this includes name, business name, phone number, email address, company address and any relevant license numbers and insurance information.
Title and Description of the Project
Your contract should include a title for your project that reflects the scope of the work. For example, if you’re renovating a bathroom, the title for the contract could be “Bathroom Renovation.”
The construction contract should also describe the scope of the project. For example, if you were writing the contract for the Bathroom Renovation project, your description might look something like this:
The General Contractor will perform bathroom renovation work including:
- Tear out existing bathroom, including bathtub, toilet, vanity and all fixtures
- Remove all floor and shower area tiles
- Re-tile flooring and shower
If applicable, your project description should also outline any permits or licenses that are required to successfully complete the project.
Projected Timeline and Completion Date
You want to be clear on how long you expect to work on the construction project. Make sure to include the date the contract becomes effective, the project start date and estimated completion date.
So, for example:
This Bathroom Renovation Contract (the “Contract”) is effective as of July 1, 2020 by and between Karen Ottway (“General Contractor”) whose address is 1542 Peel Ave., Calgary, AB, A7B 5F3 and James Baldwin (“Owner”) in order to set forth the terms and conditions agreed to by and between General Contractor and Owner regarding the home improvement work at the Owner’s property located at 463 Jefferson Drive, Calgary, AB, AL2 3T4, beginning August 23, 2020 and ending on or before September 30, 2020.
Your contract should also include clear verbiage on what happens if you can’t complete the work by the projected completion date. For example:
If the work outlined below cannot be completed on the specified date, the General Contractor will communicate expected changes to the date with a minimum of 24 hours notice and will offer a new completion date.
Cost Estimate and Payment Schedule
One of the most important things to make clear in your construction contract is your cost estimate and payment schedule for the project.
Prior to drawing up the contract, you should send your client a cost estimate to make sure you’re on the same page. Then, include that cost estimate in your construction contract along with a payment schedule.
In terms of payment, you should always ask for a non-refundable deposit in order to start working. For example:
Owner agrees to pay General Contractor $7,000 plus the cost of materials for completing the Bathroom Renovation project. Upon signing of this Contract, Owner shall pay General Contractor a non-refundable deposit of $2,000.
Then, you can design a payment schedule based on project milestones. For example:
Phase 2: When tiling is complete, Owner shall pay General Contractor $2,000.
Phase 3: When all fixtures have been installed, Owner shall pay General Contractor $1,000.
You’ll also want to include a line about late fees, like:
Upon completion of the Bathroom Renovation project, payment is due for the entire unpaid balance of the Contract Price less the non-refundable deposit. If the Contract Price is not paid upon completion of the Work pursuant to the term and conditions of this Contract, interest shall accrue at a monthly rate of X percent.
Stop Work Clause and Stop Payment Clause
A stop work clause gives you the legal right to stop the project if the client hasn’t paid you. The stop payment clause gives the client the right to withhold payment if you don’t hit the established project milestones or don’t do the work at the agreed-upon quality level. And for peace of mind, you’ll want to include both clauses.
Act of God Clause
Sometimes, you may run into circumstances that prevent you from completing a project on time that are out of your control. It’s important to account for those circumstances in your construction contract.
An Act of God clause outlines how you and the client will move forward if faced with one of these unforeseeable circumstances, like a hurricane, earthquake or widespread material shortage. Make sure you account for any and all issues that might arise.
Change Order Agreement
Things may change over the course of your project. Your client might even decide they want to expand the scope of the project.
A change order agreement allows for either party to deviate, change or add to the original contract with a written document signed by both parties. Including this agreement will allow you to easily amend your project scope or the terms of your contract if things change down the line.
Your client needs to know that you’ll stand behind the quality of your work. And that if the project wasn’t completed to a high standard of quality, you’re going to take responsibility and fix it.
A warranty gives your client that peace of mind by guaranteeing your work for a specific period of time (typically one year). Most clients won’t work with a contractor that doesn’t offer some kind of warranty. So it’s definitely something you’ll want to include in your construction contract.
Dated Signature from Both Parties
Contracts aren’t legally binding unless they’re signed by both parties. So make sure your construction agreement is signed and dated by both yourself and your client.
Construction Contracts Protect Your Business
Having a construction contract helps to get you and your client on the same page before you move forward with a construction project. And it helps to protect you if there are any disputes, disagreements or issues with payment over the course of said project. And now that you know what to include in your construction agreement, you have everything you need to add that layer of protection to your next big project.
This post was updated in June, 2020.