What Is a Construction Contract Agreement?

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A construction contract agreement is a document that lays out the terms of a construction project. It is a legal document that defines the work being done, which all the parties involved must agree to.

Learn what should be part of a construction contract agreement and why it is important to have one before beginning any construction work.

What Is a Construction Contract Agreement?

A construction contract agreement is a document that sets the scope and terms of work for a construction project. It is an agreement between the contractor doing the construction and the person or company who hires them to do the work.

The agreement should contain several sections of clauses defining the scope, terms, and conditions of the project, including:

  • What work will be done
  • When it will start and be completed by
  • Which parties will participate in the construction process
  • The cost of labor and materials
  • How the parties will communicate
  • Procedures for changing the scope of work or other parts of the agreement
  • How disputes will be resolved

How a Construction Contract Agreements Works

Most construction companies or contractors will have a template they use as the basis of their construction contract. This template will outline their standard operating procedures, rates, and other conditions.

Depending on the project, each agreement will be slightly different, with modifications made for scope of work, cost, and more, depending on the job. However, most contract agreements should include certain sections to protect parties on both sides of the agreement.

  • Project description: This details what the project is about, including the most important idea or description of the problem being addressed. It can be a summary of items or just a paragraph.
  • Contract price: The type of contract price that has been awarded and the total amount of money being contracted are detailed, as well as possible additions or deductions to the contract and how they will be released.

Prices should always be negotiated and established before a contract is signed in order to avoid any confusion, disagreement, or legal disputes.

  • Payment basis: This describes the money that will be paid to the contractor, whether on a weekly, monthly, or milestone basis. This section should also specify what percentage of money should be retained on every application for payment. It will also define when the payment is due, the penalty for late payments, whether interest is accrued, and any other payment and invoicing terms.
  • Schedule or calendar: The total number of days or how the project schedule will be divided, it should describe either calendar days or business days and can be presented as a Gantt Chart, bar chart, CPM, or another method.
  • Document list: A list of all contract documents forms this part of the contract agreement. Drawings, exhibits, specs, and supplemental conditions can be part of this list.
  • Construction scope: The scope normally can be measured or quantifiable and is a description of all construction activities that will form part of the project.
  • Construction conditions and responsibilities: Responsibilities for the owner and the contractor, including who is responsible for providing documents, information, payments, or other deliverables are laid out so the project can progress on time. It should contain specific terms for liens, penalties, withholding, and arbitration rules, as well as specific instructions on how to process claims and proceed with disputes.
  • Contract laws: Any applicable legal requirements, including governing laws, liens requirements, claims procedures, arbitration procedures, insurance, substantial completion requirements, final completion, and liquidated damages are detailed. This may also include procedures for how to terminate or suspend the work and the agreement with the contractor.

Once the contract is finalized, it should be signed by both parties before any work begins. By signing, both parties indicate that they agree to the project terms.

If either party breaks the terms of the agreement, the contract should outline procedures for how the dispute can be addressed, including legal action.

Types of Construction Contract Agreements

All contracts should:

  • Be in writing
  • Contain a description of the product or service being offered
  • Be understood and clear between both parties
  • Include services being contracted clearly
  • Include cancellation or termination policy
  • Have financial terms clear

However, depending on the project and the contract being executed, they can vary or have several modifications.

Express

This type of agreement defines the purpose and scope of the agreement. Under this alternative, the stipulations and terms of the contract are understood clearly by each part.

Executed

An executed contract agreement provides a warranty period or malfunction. Under this agreement, services have been rendered, but the contract protects one party when the other's performance fails to provide the proper warranty for defective or incorrect installation.

Conditional

A conditional contract agreement is an agreement used when services could not be provided at the time the contract was signed. It stipulates a future date when services will be rendered if certain conditions are met.

Do I Need a Construction Contract Agreement?

A contract agreement protects both the parties involved in construction work. It defines your scope of work, outlines terms for payment, and provides methods of settling disputes.

Without a proper contract, any disagreements or miscommunication over the work involved in the project, schedule, missed or late payments, or other concerns could turn into a major legal battle. This can become costly for both the property owner and the contractor.

Having a construction contract agreement protects the legal and financial stake of everyone involved in a construction project. Neither the owner of the construction company nor the owner of the property should agree to start work without one.

Key Takeaways

  • A construction contract agreement is a document that sets the scope and terms of work for a construction project. It is an agreement between the contractor doing the construction and the person or company who hires them to do the work.
  • The agreement should contain several sections of clauses defining the scope, terms, and conditions of the project, including what work will be done, the project schedule, payment terms, legal requirements, how disputes will be resolved, and more.
  • A construction contract agreement protects the legal and financial stake of everyone involved in a construction project. Neither the owner of the construction company nor the owner of the property should start a construction job without one.