Construction Contracts: Types, Best Practices & Mistakes

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No matter the project or the team, it is important to outline expectations. This is especially true of construction projects.

Construction projects often require outside specialists to complete aspects of the work, and construction contracts bridge the gap between contractors who they hire so everyone knows what is required.

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What is a Construction Contract?

A construction contract is a formal agreement of terms between an owner seeking to outsource work and the independent contractor or specialist who intends to take up the job.

A construction contract should include details about the construction project, the project’s scope and a breakdown of the outsourced tasks. It should also detail contingencies between the contractor and the owner for situations in which issues affect the project timeline.

Why is a Construction Contract Necessary?

Construction contracts protect both parties in the agreement. These documents detail what work will be completed, when it will be completed and how much it will cost. They also outline methods of communication and how disputes will be handled if they arise.

By including information about communication and changes, construction contracts streamline the decision-making process. Ideally, project risks have been anticipated and the contract outlines on how best to proceed. A construction contract is, first and foremost, an agreement, but it serves as a roadmap of sorts as well.

Who is Involved in Construction Contracts?

Construction contracts involve two parties; owners and contractors. The owner that needs a job outsourced, and the contractor who will execute the job. The two parties work together to draw up a contract and agree on the terms of completion and payment.

Owners contract builders when they need to execute a specialized job they cannot perform on their own. They may also contract builders when the scale of the project is too large for them alone. Construction projects, in particular, often require owners to hire several different contractors. In this case, thorough construction contracts is crucial to the successful management of the project.

Types of Construction Contracts

Because construction projects take many forms, different projects will require contracts with different characteristics. Before creating a construction contract, you must know which type of contract best suits your needs:

Lump Sum Contract

A lump sum contract (also called a fixed price contract) names a total price for the entire job. This price accounts for all time and materials, regardless of changes or issues. This type of contract protects owners against unforeseen changes and setbacks.

Lump sum contracts can seem as though they favor the owner over the contractor, but there are ways to balance the scales. Many contractors charge an additional percentage for signing lump sum contracts, as they will be taking a higher risk. Additionally, incentive programs are often put in place by owners to reward jobs being completed early.

Cost Plus Contract

Cost plus contracts are made of two parts: a predetermined fee and accumulated costs. This fee is the agreed price owners will pay contractors. It can be a dollar amount, a percentage of the total project cost or another form of payment. The defining characteristic of a cost plus contract is it reports expenses as they occur rather than deducting costs from a set budget.

A cost plus contract is used when construction project expenses are uncertain. While this can seem a liability, cost plus contracts often include incentives for coming in under budget and caps on expenditures. This avoids conflict and ensure contractors are paid a fair overhead.

Time and Materials Contract

Time and materials contracts are a fitting choice when the scope of a project is totally unknown. In this case, contractors will charge an hourly rate for labor and for materials as needed. Because this does leave uncertainty, these contracts must be specific and prepare for almost anything. An owner should include incentives for construction projects completed ahead of schedule and/or under budget.

A time and materials contract is a good choice for small projects, as they require such close supervision. For example, all costs must be carefully monitored and classified in order to document them closely and ensure contracts are adhered to. As you can imagine, this becomes more and more difficult the larger the project. The advantage to choosing a time and materials contract is it protects owners from overpaying contractors.

Unit Pricing Contract

A unit pricing contract is used when an owner wishes to buy a large quantity of a certain product. Each product is a unit and costs a set price. These items can also often be charged in bulk quantities for a reduced price.

Unit pricing contracts are advantageous when an owner knows exactly how much of a specific product they need. Using this type of contract and buying all the units at once is also a good way to protect against potential future inflation of material prices. By buying all the items at once, owners generally pay less than they would in the future and don’t have to worry about drawing up another contract in the future.

Best Practices for Writing Construction Contract

No matter what type of construction project you’re planning, these best practices ensure your contract is a clear, detailed arrangement:

Include Incentives

One of the best ways to set a construction project up for success is by creating incentives. Incentives are useful when scope is undetermined and budget, time and labor costs are up in the air. Incentives encourage both contractors and owners to work efficiently and complete a project on time and under budget.

Clearly Outline Expectations

Be clear when conveying expectations on how expenses will be reported, how communication will be maintained or how any other aspect of a construction project is managed. Outline a contract and break it into key points the contractor can refer back to.

Create Contingencies

The best construction contracts have contingency plans. More often than not, something unexpected will happen during the duration of a construction project. When construction contracts have contingencies, both the owner and the builder have a roadmap of what to do when something goes wrong.

What to Avoid When Writing Construction Contracts

Here are three common mistakes to learn from and avoid in your construction contracts:

Not Being Specific

One common mistake is to generalize rather than specify. The point of a construction contract is to detail the exact terms of the agreement between an owner and a builder, and there should be no room for interpretation. There is no such thing as an overly detailed contract.

With this in mind, construction contracts should remain clear and unclouded by unnecessary details. Find a balance between anticipating everything that should be included and editing down information that dilutes the key points.

Not Establishing Communication

When writing a construction contract, specify exactly how and when a contractor should communicate. This communication can be in the form of regular check-ins or only in the case of significant changes, but both parties must know when to run something by one another before making decisions.

Lack of communication is detrimental to construction projects. Because there are so many moving parts, everyone must understand their role in relation to one another. A well-written construction contract sets up a system of communication and makes it clear where to direct questions and updates.

Not Detailing How to Manage Changes

Changes are inevitable in any project, but never more so than in construction projects. Construction projects have countless moving parts and involve many individuals and, often, many different contractors. This means adjustments will be a natural part of the project.

A detailed construction contract means these changes don’t have to be bumps in the road. When contracts stipulate exactly how changes are to be made, who makes them, and how the process looks, everything runs smoothly. On the other hand, when these details are not clear, contractors won’t know how to make changes, who to go to for approval and how to document what changes were made.

How to Use ProjectManager.com For Your Construction Contracts

ProjectManager.com gives you the power to manage construction projects from start to finish, on the go. Create a comprehensive project plan, complete documents and assign tasks from the job site or anywhere else you get work done.

Gantt Charts

We have an online Gantt chart for you to plan your construction project from start to finish. Add durations to your tasks, and a bar chart is generated. If any tasks are dependent, they can be linked, and milestones can be set across the timeline.

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Resource and Team Management

Managing resources can be complicated, but our cloud-based resource management software gives you the real-time data you need to make the best decisions. Categorize your teams, supplies and equipment, add hourly rates, and when hours are logged the actual cost is automatically compared to the planned cost.

Timesheets

As your teams log their hours our time tracking feature automatically updates when workers finish their tasks, making payroll a breeze. You can also track their progress on the real-time dashboard, which displays key project KPI’s in scannable graphs and charts.

ProjectManager.com is a cloud-based project management software that has the tools you need to manage your construction project. Our robust features make planning, scheduling and reporting down to the last task more efficient and effective. Plus, the data you get is more accurate because it’s updated as your team works. Try ProjectManager.com free with this 30-day trial offer.

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