 A well-drafted construction contract clearly sets out the work to be done,
the price to be paid for the work, and the terms and conditions of payment. Each construction
contract should also allocate various foreseeable risks between the parties.
When the parties allocate a list of potential risks, the construction contract
becomes longer, but it reduces the potential for disagreements in "gray areas" that are not addressed
at all - assuming that both parties take the time to read and understand the lengthy, dryly-worded
document. Of course, failure to read a written agreement is not a valid defense.
Construction contracts are often formed through the bidding process. The project
owner requests a quote or issues a more formal request for proposals, and contractors wishing to
perform the described work respond with the price that they would charge. The contractor's bid
constitutes a binding offer, which if accepted, results in a legally enforceable contract.
The acceptance of a bid is generally referred to as an "award" of the contract.
In the case of private construction contracts (as opposed to government contracts),
the property owner requesting bids is generally free to accept or reject any bid, regardless whether
the bid is the lowest or most responsive one. In the case of public contracts, however, the bidding
process must follow strict rules set forth in federal, state, and local laws and regulations.
Construction contracts consist of terms of agreement ranging from price and description
of materials to be used to an agreement that any disputes will be resolved through arbitration. Courts
are reluctant to imply terms that are not expressly part of the contract, but courts may look to local
custom if the contract is silent on a hotly disputed key issue.
Example: Under local custom, the contractor had to obtain a certificate of occupancy
before final payment. But the written agreement in question had no clause requiring the contractor to
furnish the certificate of occupancy. The court found that the local custom was part of the agreement
by implication.
Parties to a construction contract generally select from one of several traditional
methods by which the contract is priced.
The following are among the most common:
Lump sum
The project owner agrees to pay a specific dollar amount for whatever is required to
complete the job, such as an agreed fixed fee of $3,306 to install a new hardwood floor. If the
contractor makes a mistake in the estimate for labor or materials, the contractor bears the loss.
Unit price
The contract is priced by the number of units delivered multiplied by a set rate per unit,
such as an agreed rate of $6.39/square foot for installing a hardwood floor. Contractors bear less risk
under unit price contracts because an error in estimating the size of the job does not stick the
contractor with overages.
Cost plus a fee
Under this arrangement, the contractor agrees to keep records of the costs for labor and
materials. The owner agrees to pay for all the submitted costs plus a markup, which can be expressed
either as a percentage or as a lump sum, such as an agreement that a contractor will install a hardwood
floor and charge the actual cost of the materials plus 35%.
If there is a dispute regarding the price, courts will first attempt to determine which
type of pricing scheme the parties agreed to use, determine which party assumed risk of error or
contingencies, and finally determine which party bears financial responsibility.
Tips to consider before signing a construction contract
At some point you will probably find yourself wondering whether you should really sign
the contract in front of you. When you hire a contractor for a home improvement project, you will be
faced with a document, hopefully, designed to protect both you and the other party. Ideally, a contract
allows the parties to define, in specific terms, the extent of their obligations to each other relative
to the delivery of products or services and payment terms.
Use the following list as a general guide. Make sure that contract terms are workable
for you. If they are not, attempt to negotiate terms that are more reasonable.
1. Time frame
The agreement should have a time frame if any aspect of your transaction will occur in
the future.
- If you are the party delivering the services, make sure that you are allowing yourself enough time to complete the job.
- If you are the party receiving the services, make sure that the delivery schedule conforms to your needs.
- If you want to contract for month-to-month services, make sure that you are not signing an agreement that obligates you for a longer period.
2. Prices
The agreement should clearly state prices. Be wary of additional charges that you have
not discussed with the other party. For example, when you contract with a professional, you will often
be quoted either by hourly rate or lump sum. Additions to the project will include additional charges.
Before you make changes, make sure you know what the additional fees are and ask for an estimate.
Changes should be in writing and signed before starting to implement the change
3. Payment method
Determine the terms of payment and whether it is appropriate to your financial situation.
For example, the contract may call for payments at the end of the month when the majority of your bills
are due. You may also be able to negotiate installment payments if you cannot afford a lump sum.
4. Payment penalties
Determine whether there are late payment penalties and if they are reasonable.
5. Material terms
If you and the other party have an understanding about the services, make sure that the
particular terms are in the contract. For example, if you have agreed to renovate a bathroom using a
particular brand name Italian tile collection, then it should be in the contract. This will help you
make your point should the buyer demand that the tiles should be Italian granite.
6. Inability to agree
If you need to have work started immediately, but cannot come to an agreement on the
final terms of an agreement, you need to make sure that you are signing a contract that is not going
to be enforceable as a permanent agreement. You can accomplish this by adding language like, "This
interim agreement is in effect only until a more permanent agreement can be negotiated by both parties."
7. Resolution of anticipated disputes
No matter how careful you are or how good your relationship with the other party, a
dispute may arise. Many contracts include an arbitration clause, which means that a dispute must be
settled in arbitration as opposed to in court. Arbitration is generally less costly and less formal
than court, but if you sign the contract with the clause intact, you have probably waived your right
to take the matter to court.
8. Anticipated problems
The party with whom you are contracting may have had prior experiences that have led it
to add particular methods of resolution to the contract. Those ideas may be perfectly agreeable, but
they could also be unfairly beneficial to the other party. Analyze whether these terms will benefit you.
9. Attorney’s fees
Determine whether you will be charged for the other party's attorney's fees if you
breach the contract and lose the case that will probably arise to enforce it. If you are prone to
breaching contracts, this is the kind of clause you should avoid.
When a construction contract is signed, it generally cannot be changed unless both
parties agree. Consequently, it is important to protect yourself prior to signing the construction
contract by understanding exactly what it is you are committing yourself to.
Related Articles:
How To Hire a Contractor
Top Ten Mistakes Consumers Make When Hiring a Contractor
When To Bid Or Not Bid A Project
How To Bid On a Construction Job
Note: MyCanadianContractors.com offers these
informative articles as resources to help you understand better some
construction related issues. MyCanadianContractors.com does not warrant the
accuracy, safety or legality of any content. MyCanadianContractors.com shall
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