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Contracts usually determine the amount of work to be done, highlight important dates, and the amount of money owed. Construction Contract is a different story altogether. These contracts differ based on the project’s scope, delivery, schedule, budget, and the parties involved. Typically, large construction projects involve various stakeholders, and these contracts define the Scope of work for each of the parties involved, their roles and responsibilities.
This blog covers the major types of construction contract documents and their importance.
What is a Construction Contract?
In simple terms, 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, schedule, cost, and responsibilities of each party involved in the project. This signed agreement is more than a handshake — it is a binding commitment that holds each party accountable, ensuring that the project advances from concept to concrete reality within the agreed-upon framework.
Why are Construction Contracts Important?
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:
- Risk Management—Construction is a complex and risk-prone industry. Contracts safeguard all the parties involved in the project from disputes and legal issues that could halt the project.
- Clarity and transparency—Contracts also help the project run smoothly. All requirements, financial details, and deadlines are clearly outlined in the contract. This ensures that all parties stay on the same page and maintain transparency.
- Legal Protection- Big construction projects often face numerous legal disputes. Contracts establish a set framework to deal with such issues, outlining the responsibilities of everyone involved and avoiding long legal proceedings.
- Project Control—Contracts help projects stay on schedule and within the set budget by clearly defining the project’s Scope, budget, and timeline.
- Communication- Contracts often define the specific communication and data-sharing channels to be used during the project. This process facilitates communication and collaboration between all parties, reducing the likelihood of misunderstandings and disputes.
Construction Contract Types
Construction projects vary greatly in terms of complexity and size, so there’s no one-size-fits-all approach to construction contracts. That’s why several types of construction contracts have been developed. Understanding the different types of construction contracts is crucial for selecting the right one for a project. A few of the most common types are discussed below:
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. This process saves the owner time and money by combining the design and construction project delivery into one contract. It also helps to streamline communications and create repeatable processes.
Incentive Construction Contracts
Incentive contracts provide the contractor with an agreed-upon payment if the project is delivered by a certain date and at a specific 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 to control costs and stay 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 contract also makes administration and cash flow estimates easy.
Unit Price Contract
Unit price contracts specify prices per unit of work, which may include materials, labour, and overhead. They work well for projects with repetitive tasks but can lead to profit loss if initial estimates are inaccurate.
Time and Materials Contract
Under a time and materials (T&M) contract, the owner pays an agreed-upon price based on the time spent on the project, required materials, and the included profit rate. Like the lump-sum contract, this construction agreement is straightforward. However, T&M contracts allow for more flexibility in the costs of the materials and account for labour rates. 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. Construction costs can include direct costs such as labour, materials, supplies, etc. They also include overhead costs such as insurance, mileage, and a portion of your office rent. Additionally, they 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. It promotes collaboration and accountability but requires a commitment from all involved to the IPD model.
Key Components of Construction Contract Documents
Generally, Construction contracts have nine different documents outlining different parts of the project. However, depending on the project’s scope, budget, and timeline, not all contacts may include all the documents mentioned below.
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 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, detailing the design, layout, and specifications for the work 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 and maintaining the quality of work 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 schedule regular check-ups for efficient management.
Schedule of Values
A 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 and can also gauge the completion of each of the contractor’s responsibilities.
Bill of Quantities
A bill of quantities is an estimate of the materials, labour, and other costs associated with the project. It allows contractors to prepare accurate bids and facilitates the client’s more efficient evaluation of these bids.
Tips for Reviewing and Negotiating Construction Contract Documents
- Understand the Terms: Familiarize yourself with the contract’s language and provisions to ensure you know your rights and obligations.
- Seek Legal Advice: Consult with a legal professional to review the contract and identify potential risks or areas for negotiation.
- Negotiate Terms: Don’t hesitate to negotiate terms that are unclear or unfavourable. Aim for a fair and balanced agreement.
- Clarify Dispute Resolution: Ensure that the contract includes clear procedures for resolving disputes, minimizing the risk of costly litigation.
- Review Regularly: Regularly review the contract during the project to ensure compliance and promptly address any emerging issues.
Conclusion
A construction contract is more than just a legal formality; it guides the entire construction process from start to finish. 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 construction. Understanding the key components and types of construction contracts, as well as how to review and negotiate them, is essential for successful project outcomes. Contact Techture today for well-prepared contract documents; construction professionals can mitigate risks and foster collaboration, leading to more successful and profitable projects.