Contracts usually determine the amount of work to be done, highlight important dates, and the amount of money owed. Construction contracts are a different story altogether. These contracts differ based on the project’s scope, delivery, schedule, budget, and the parties involved. Typically, large residential construction projects involve various stakeholders, and these contracts define the scope of work for each of the parties involved and their roles and responsibilities.
This blog covers the major types of construction contract documents and their importance.
What is a Construction Contract?
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Construction contracts are legally binding agreements that explain the work that a general contractor will perform and the payment that a project owner will make. They describe the scope and schedule of projects with details of the costs. You can clearly define the responsibilities of each party involved in the project. It is a binding commitment that holds each party accountable.
Why are Construction Contracts Important?
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Construction contracts declare the requirements of everyone involved and also protect the interests of all parties involved in the project. The main reasons that these contracts are vital in the industry are:
- Contracts safeguard all the parties involved in the project from disputes and legal issues that could halt a project.
- The contract explains all requirements and financial details with specific dates for completion. This will ensure all parties are briefed similarly, keeping everyone on the same page and more transparent than otherwise would be possible.
- Major construction projects are usually associated with a lot of legal disputes. Contracts define a well-structured framework to control the issues and liabilities of each party involved.
- The clear statements of the scope of the project and timeline give a clear understanding regarding the scope, which keeps the projects on schedule and within the budget.
- Specific channels of communication and data sharing to be used during the project. This process is to ensure that all individuals involved are able to communicate with one another and reduce conflict in any given event.
Construction Contract Types
Design-Build Contract
Traditionally, owners receive completed designs before taking in construction bids. That leads to two separate construction contracts and a longer process. But the design-build contract does things differently. As the name suggests, a design-build contract addresses design and construction costs simultaneously. Under this type of contract, the construction process actually begins before the final design is completed. The owner can save time and money since design and construction project delivery are combined under one contract..
Incentive Construction Contracts
The incentive contracts offer a predetermined amount of money to the contractor if the project is completed on a given date and at an exact point.
If the project is delivered at a lower cost and/or by the target deadline, the contractor receives extra payment. The amount they receive is specified in the construction contract and may be based on a sliding scale. In other words, the contractor is incentivized for controlling costs and staying on schedule.
Lump-Sum Contract
With a lump-sum contract, the contractor delivers the project at a preset price. The contractor will deliver a total price for the project rather than bidding on the deliverables. The construction agreement is relatively simple and works well for projects with a well-defined scope. They’re popular with straightforward work that doesn’t require detailed estimates. This type of construction contracts also makes administration and cash flow estimates easy.
Unit Price Contract
Unit price contracts specify prices per unit of work, which may include materials, labor, and overhead. Your projects with repetitive tasks can adopt them but can lead to profit loss if initial estimates are inaccurate.
Time and Materials Contract
An owner pays a time and materials contract based on the time spent on the project and the profit rate. Like the lump-sum contract, this construction agreement is simple and straightforward. They may also include a mark-up for the materials if they are purchased at wholesale rates.
Cost-Plus Contract
Under a cost-plus contract, contractors are paid for all of their construction-related expenses. That’s the cost part of the name. The construction costs can include direct costs such as labor, materials, supplies, etc. They also include overhead costs such as insurance, mileage, a portion of your office rent. Additionally, they also receive an agreed-upon amount for the profit. That’s the “plus.”
Integrated Project Delivery Contract
An integrated project delivery contract involves a multi-party agreement between the design firm, the builder, and the owner, sharing risks and rewards among all parties. You will gain collaboration and accountability with a commitment to the IPD model from all involved.
Key Components of Construction Contract Documents
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Construction contracts have nine different documents outlining different parts of the project. Some contacts may not include all of these documents because every project has a different budget and timeline.
The Agreement
The agreement consists of the major terms and financial details that govern the entire project. This document sets the tone for the entire duration of the project. All subsequent project details from kickoff to completion are defined and developed.
General Conditions
General Conditions are a common part of any contract. They typically act as a rulebook and provide proper instructions for submittals, procedures for change orders, and protocols for payment applications.
Special Conditions
Project specific requirements that are not included in the general conditions are then included in the special conditions part of the contract. These might range from environmental sustainability features — like green building standards — to specific safety protocols unique to the project’s nature or location.
Scope of Work
The scope of work contains exactly what it says; it describes the extent of project requirements and lists down the tasks and objectives for each party involved. A work breakdown structure may be used to separate tasks so that they are easily manageable.
Construction Drawings
Construction drawings offer a visual representation of the project with the detailing of the design. Your construction layout and specifications for the work will also be there to be completed. These drawings are instrumental in guiding the construction work effectively.
Specifications
Specifications outline the project’s technical data, material requirements and construction methods ensuring strict adherence to industry standards so that the quality of work is maintained throughout the project
The Schedule
Construction Schedule refers to the timeline that will be followed throughout the project. It marks important milestones that guide the construction process and helps the project admin to schedule regular checks ups for efficient management.
Schedule of Values
Schedule of values is an important document in the project management of any major construction project. It allocates funds for each portion of the contractor’s work. It can also be used as a means to gauge the completion of each of the contractor’s responsibilities.
Bill of Quantities
Bill of quantities is an estimate of the materials, labor, and other costs associated with the project. It allows contractors to prepare accurate bids and facilitates the client in evaluating these bids more efficiently.
How To Analyze and Comment Upon Construction Contract Documents?
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- Learn the terms and conditions of the contract so that you know what is expected from you and your rights.
- Speak to an attorney about your contract and discuss fine print. See where you can negotiate.
- Negotiate on ambiguous or unfavorable terms without fear; aim for a just and equitable agreement.
- Include provisions for the resolution of dispute to avoid costly litigation.
- Review the contract during the life cycle of the project to check on compliance and then respond to emergent issues promptly.
Conclusion
A construction contract is more than just a legal formality; it guides the entire construction process from start to finish. And, when everyone involved in a project has a good understanding of what is included in the contract documents, it ensures that all parties are aligned with the project objectives and will minimize disputes during the course of construction. Understand the key components and types of construction contracts and negotiate them well for successful project outcomes. Techture can assist construction professionals with well-prepared contract documents and ensures fewer risks and better collaboration.
FAQ:
How is the contract price determined in a construction contract?
Contract price is determined based on the project’s scope and estimated costs. You have to decide which type of contract you want to use. Consider factors like materials, labor, and overhead costs with the profit margins while deciding on the contract document.
How are disputes typically resolved in construction contracts?
Mediation, arbitration, or litigation are some techniques to resolve disputes. Clear dispute resolution procedures help minimize delays and legal costs.
How is the project schedule determined and documented in a construction contract?
The project schedule is generated based on scope of work, availability of resources, and the constraints in the agreement specified within the contract. Typically, it is documented in the agreement that is reviewed and updated often during the project period.
What are the circumstances that result in the termination of a construction contract?
A construction contract may be terminated on grounds of non-performance or simple breaches of contract or by mutual agreement. The parties must detail in the contract the conditions under which a party is entitled to terminate a construction contract.
