Construction contracts are foundational documents that define the scope, responsibilities and expectations of a construction project. For contractors, a thorough understanding of construction contracts is crucial to ensuring project success, mitigating risks and protecting their business interests.
A construction contract typically includes several critical components, such as the scope of work, project timeline, payment terms and conditions for changes or termination of the contract. Understanding these components allows contractors to manage client expectations effectively and to better ensure clear communication throughout the project lifecycle.
Common types of construction contracts
There are various types of construction contracts, each with its own advantages and potential drawbacks. Some common types include:
- Lump sum contracts: Contractor agrees to complete the project for a fixed price
- Cost-plus contracts: Cover the actual costs plus a percentage or fixed fee for the contractor’s profit
- Time and materials contracts: Payment is based on the labor and materials used
Selecting the right type of contract depends on the project’s specifics, risk allocation preferences and the contractor’s ability to manage those risks.
Risk management points
Construction contracts play a role in risk management and allocation between the contractor and the client. They should clearly outline each party’s responsibilities, including who bears the risk for unforeseen circumstances such as bad weather, material price increases or site conditions that differ from what was expected. Contractors must pay close attention to these clauses because these can significantly affect their exposure to risks and potential liabilities.
Change order procedures
Change orders are a common aspect of construction projects, reflecting adjustments to the scope of work, project timeline or materials used. A contract should include clear procedures for initiating, approving and implementing change orders to ensure that any changes are documented and compensated appropriately. This helps prevent disputes over scope creep or unauthorized changes, which can lead to delays and increased costs.
Dispute resolution methods
Construction contracts should specify dispute resolution methods, including negotiation, mediation, arbitration, or litigation. Understanding and agreeing to these mechanisms before the project begins can save both parties time and money by providing a clear path to resolving conflicts without resorting to costly and time-consuming legal battles.
Every project a contractor works on should be governed by a comprehensive construction contract. Seeking legal guidance while drafting or updating a contract is valuable to better ensure that it adequately protects the business.
