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Basics of Construction Contracts

Updated: Mar 15, 2022

Basics of Construction Contracts-creating a good construction contract is a skill that every constructor should know inside and out, whether he or she is a solo owner-builder or the head of a large construction firm. Although various contractors use different checklists when creating a contract, there are commonalities that should be followed no matter what form the printed contract takes.

In most good contracts, the builder starts with the most basic of line items, adapting the contract to the complexity of the project. Aside from the construction work itself, creating the contract is one of the most important parts of the project. There are seven major areas to consider when developing your skills at creating successful contracts for your construction business.

Basics of Construction Contracts

1. Contract Documents

A construction contract is often a combination of individual documents detailing different aspects of the project, or it can be a complex, multi-page document with many sections that offer details on different aspects of the agreement.No matter what you are building, having a solid contract represents one of the first steps toward the success of the project.

2. Contract Types

Different types of construction contracts are used within the building industry. Construction contract types are usually defined by the manner in which the disbursement is going to be made, but they may also specify other terms, such as duration, quality, specifications, and other issues of similar importance.

3. Successful Contract Negotiations

When the time comes for a builder to sit down with union representatives or project stakeholders, he needs to be prepared. A good negotiator should have the skills that allow for the right deal to be struck—one that achieves set goals while leaving both parties satisfied. Face-to-face negotiations, although rare, can sometimes make things even worse. Certain tricks and methods can ensure that everyone leaves the table feeling that they have a good deal.

4. Direct Hire or Subcontract

Builders have two options for completing work on a project: direct hire their own employees or subcontract the work to independent contractors. It is not an easy decision.

Subcontracting can offer warranties that can make your work easier while hiring someone directly requires additional efforts as far as oversight and management.

But direct hiring often gives the builder more control over costs and quality. How does a contractor decide between the two? Based on the scope of the project and existing relationships with subcontractors, the project manager will make the decision based on what is most cost-effective and timely.

A construction contract agreement is a principal document that sets a date and specifies which parties are going to participate in the construction process. Usually, the contract agreement is executed between the owner of the project and the contractor (or supplier) that is providing the requested service. The contract generally contains several clauses that define the scope, terms, and conditions of the agreement.

Differing site conditions can increase construction costs and can delay breaking ground on the project. A contractor developing contracts needs to know how to handle this possibility and include language that protects against unforeseen circumstances.

Normally, differing site conditions surface during the first weeks of the project, potentially affecting the schedule and causing unforeseen delays. Considering the repercussions of delays, it is crucial to document how such impediments affect the general contract.

7. Construction Contracting Escalation Clause

Escalation clauses are often written into construction contracts. They are more typically included on large construction projects, where the job might require more than one year to complete and where it carries substantial financial backing and risk. For example, the potential for economic changes such as a gas shortage or oil glut may require contract escalation clauses, even on small and medium-sized projects. If executed properly, escalation clauses protect the contractor from unpredictable charges.

You now know the 7 basics of construction contracts that will get you on your way. It is important to remember that construction contracts are a collection of different documents. They can be quite lengthy. Make sure to pick the type of contract that will suit your needs and be as detailed as possible. This way all construction parties know where they stand and what they are entering into.

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