What You Need to Know About Contracts for Construction?
Construction contracts are the foundation of any building project. Knowing how these contracts work can help you avoid costly misunderstandings and delays, whether you’re a homeowner, investor, or developer. Here’s what you need to know:
- What Is a Construction Contract?
A construction contract is an agreement between the property owner and the contractor that must be followed by law. It specifies both parties’ legal rights as well as the project’s scope, timeline, payment terms, materials, and responsibilities.
- Types of Construction Contracts
There are a variety of contracts, each with advantages and disadvantages:
- Lump-Sum (Fixed Price): A single, all-inclusive cost for all work. Best for projects with a well-defined scope.
- Cost-Plus: The owner bears the actual costs in addition to a fee. useful when the scope is not completely understood.
- Time and Materials (T&M): Payment is based on labor time and material costs. Good for smaller, flexible jobs.
- Unit Prices: Costs are based on rates per unit, such as per square foot. Often used in commercial or infrastructure work.
- Important Features to Look For
When reviewing a contract, make sure these essentials are clearly defined:
- Scope of Work: What exactly is being built or renovated is the scope of the work.
- Timeline: Start and completion dates, with milestones if applicable.
- Payment Schedule: When payments are due and under what conditions.
- Change Orders: The procedure for handling modifications to the initial plan.
- Warranties: What kinds of work and materials are covered by warranties, and for how long?
- Dispute Resolution: How issues will be resolved (mediation, arbitration, court).
- Red Flags to Watch Out For
- Vague language or missing details.
- Ambiguous responsibilities
- No penalty clauses for delays.
- Large initial payments with no progress indicators.
- Why it’s important?
A solid construction contract protects your investment. Expectations are set, risk is reduced, and you have legal recourse in the event that something goes wrong. Always have contracts reviewed by a qualified attorney, especially for larger or more complex projects.
How to Handle Construction Contracts?
- Prioritize Your Homework:
- Verify your contractor by checking references, insurance, reviews, and licenses.
- Know exactly what you want done before entering into negotiations. Understand the scope of the project.
- Choose the Right Type of Contract:
Choose a type of contract that is suitable for your project and risk tolerance:
- Projects with a fixed price lump sum.
- Cost-Plus for evolving or flexible scopes.
- Materials and time for small or irregular jobs.
- Cost per unit for extensive or repetitive work.
- Get everything down on paper:
- Verbal contracts are risky, so have a written agreement at all times.
- Include materials and precise plans, specifications, and drawings.
- Define Clear Terms
Make sure the contract includes:
- Work’s scope
- Terms and milestones for payments
- Start and end dates
- Repercussions for delaying
- Change order procedures
- Work and material guarantees
- Clauses of termination
- Involve a Lawyer
- The contract should be reviewed by an attorney, particularly for projects of high value or complexity.
- They’ll help catch loopholes, vague language, or anything one-sided.