Construction contracts come in all shapes and sizes, from smaller $1 million projects to multi-million dollar undertakings. However, whether your project is modest or monumental, a strong contract is essential for a successful, smooth construction experience. At USA Construction Consultants, we’ve reviewed countless contracts and witnessed how effective agreements can prevent costly disputes and misunderstandings. Here’s a comprehensive guide to the construction contract basics which should be included to protect your interests and streamline project management.
1. Executed Agreement: Don’t Start Without It
Before any work begins or costs are incurred, ensure the contract is signed by both parties. Until the contract is fully executed, all costs presented by the contractor should be considered estimates. The signed contract not only secures project expectations but also solidifies accountability. USA Construction Consultants recommends never skipping this step—even if you’re eager to get started, hold off until you have that signed agreement in hand.
2. Defining the Date of Commencement
Every project needs a clear starting point, known as the Date of Commencement. This date could be tied to a signed contract, receipt of necessary permits, or an agreed-upon day in the future. It’s essential for aligning expectations and deadlines across the board. A common issue we’ve seen is ambiguity surrounding start dates, so make sure this date is unmistakably defined.
3. Specified Construction Duration and Preliminary Schedule
Time is money in construction. A defined construction duration and preliminary schedule should be included, offering a roadmap from commencement to completion. We recommend including the following:
- Construction Duration: Set a realistic timeline for project completion.
- Weather Days: Weather can disrupt construction schedules, so it’s smart to build in a specific number of weather days, along with a clear definition of what counts as a “weather day.”
- Gantt Chart Schedule: Attaching a Gantt chart-style schedule offers a visual representation of tasks, timelines, and dependencies, allowing all parties to monitor progress and hold each other accountable.
Contracts should also require the contractor to update the schedule regularly, especially when unforeseen delays arise. This keeps everyone informed and helps avoid misunderstandings.
4. Defined Basis of Payment: Stipulated Sum vs. Cost of the Work
The basis of payment is a critical part of your contract. Typically, two main methods exist:
- Stipulated Sum (Lump Sum): In a stipulated sum agreement, the contractor is paid a set price based on the level of completion for each work item.
- Cost of the Work: Here, payment is made based on actual expenses incurred in completing specific work items.
If you’re opting for a Cost of the Work contract, USA Construction Consultants strongly recommends establishing a Guaranteed Maximum Price (GMP). A GMP sets a cap on costs, protecting the project from spiraling expenses. Without a GMP, there’s no limit to what could be charged for the work, creating potential risk for both the owner and lender.
5. Payment Frequency and Terms
Setting a clear schedule for payment submissions and approvals is essential. This includes:
- Billing Frequency: Specify how often the contractor can submit billing (e.g., monthly).
- Approval Timeframe: Allow sufficient time for the owner and architect to review and approve invoices.
- Lien Waivers: To ensure transparency, require the contractor to submit an interim or final lien waiver for each payment.
Retainage—an amount held back from each payment until substantial completion—should also be specified. USA Construction Consultants generally recommends a retainage rate of at least 5%, though 10% is more common. Retainage incentivizes the contractor to complete the work properly while providing a financial cushion for the owner if issues arise.
6. Clear Scope of Work Definition
The scope of work is the backbone of your contract. A well-defined scope is crucial for ensuring all parties know exactly what work is included—and what’s not. Key elements should include:
- Project Plans and Specifications: These documents outline the work to be completed, providing a blueprint for what the contractor is responsible for.
- Clarification and Exclusions Exhibits: Contractors often add exhibits that list clarifications, exclusions, or assumptions. Including these as part of the contract reduces the risk of “scope creep” and unexpected costs.
Ensuring all scope items are clearly outlined can prevent costly disputes over what was or was not included in the original contract. A detailed scope of work provides clarity and protects all parties.
7. Detailed Cost Breakdown / Schedule of Values (SOV)
A Schedule of Values (SOV) provides a breakdown of the total contract amount, giving all parties a transparent view of each component’s cost. For example, a line item labeled “Sitework” costing $2 million might lack the details needed to understand the scope of that expense. By providing a more detailed SOV, owners and lenders can track specific billings throughout the construction process.
If allowances are used for any items, they should be clearly noted in the SOV or included in the clarifications exhibit. USA Construction Consultants has seen numerous projects benefit from a well-detailed cost breakdown, as it helps avoid billing misunderstandings and keeps all financial elements organized.
8. Additional Considerations for Projects
Its also important to consider these provisions for unforeseen issues or conflicts in case they arise:
- Change Order Provisions: Detailed provisions for change orders outline how modifications to the project will be handled, including cost impact, schedule adjustments, and the formal approval process.
- Safety and Insurance Requirements: Ensure that all parties have clear guidelines on safety protocols and insurance requirements.
- Dispute Resolution Clauses: While every effort should be made to avoid disputes, including a resolution mechanism like arbitration can save time and money if conflicts arise.
Including these additional provisions in your contract can help manage the complexities of when things go wrong and reduce potential legal headaches.
Why USA Construction Consultants Recommends AIA Contracts
The American Institute of Architects (AIA) contract forms are industry-standard agreements widely accepted in construction. These contracts include predefined areas for critical contract elements, making it easier to establish clarity on all points discussed. AIA contracts provide a strong foundation that owners and contractors can customize based on project needs while maintaining a high standard of transparency and accountability.
The Role of USA Construction Consultants in Contract Reviews
Contract reviews can be complex, requiring a comprehensive understanding of construction processes and project requirements. At USA Construction Consultants, we take a personalized approach to reviewing construction contracts. Our team looks at the contract in the context of your specific project, assessing the presence and adequacy of key elements and ensuring alignment with industry standards. Here’s how we help:
- Detailed Contract Analysis: We review your contract for essential elements, ensuring nothing critical is overlooked.
- Tailored Advice for Your Project: We understand that every project is unique. We customize our recommendations based on your project’s size, complexity, and specific needs.
- Guidance on Cost Management and Compliance: USA Construction Consultants is experienced in cost control and compliance. We provide guidance on setting cost ceilings, retainage, lien waivers, and other mechanisms to keep costs in check and avoid legal complications.
Our goal is to help you build a contract that sets your project up for success, from beginning to end.
Key Takeaways
Here’s a quick recap of the fundamental items to include in every construction contract:
- Executed Agreement: No signed contract, no project.
- Date of Commencement: Define the starting point.
- Construction Duration and Schedule: Set clear expectations for project timelines.
- Basis of Payment: Know the difference between Stipulated Sum and Cost of the Work.
- Payment Terms: Establish billing frequency, retainage, and lien waiver requirements.
- Scope of Work: Make sure every detail is documented.
- Cost Breakdown/SOV: Keep finances transparent with a detailed Schedule of Values.
- Additional Provisions: For complex projects, consider adding change orders, safety guidelines, and dispute resolution.
When you’re equipped with a well-structured contract, you’re not only protecting your investment but also setting the stage for a smoother, more efficient project. USA Construction Consultants is here to guide you through the process and ensure your contract serves your best interests.
A construction contract is more than just a piece of paper—it’s the framework for your project’s success. Ensuring these basic items are included helps build a solid foundation, promotes trust, and can make all the difference in achieving your project goals without unexpected roadblocks.
If you’re starting a new construction project, or want a professional review of your current contract, contact USA Construction Consultants today. With our expertise and commitment to quality, we’ll make sure your contract is clear, comprehensive, and aligned with industry best practices.
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