Key Takeaways

  • A construction contract is a legally binding agreement that outlines project terms, timelines, and financial responsibilities between property owners and contractors.
  • Using a detailed contract helps prevent disputes, defines liability, and ensures compliance with state and local regulations.
  • The most common construction contract types include lump-sum, cost-plus, time and materials, unit price, and guaranteed maximum price (GMP) agreements.
  • Each contract type has unique advantages and risk profiles that suit different project scopes and client needs.
  • A strong construction contract should specify payment schedules, scope of work, dispute resolution mechanisms, and quality standards.
  • Without a written contract, both parties risk cost overruns, project delays, and legal exposure.

A building construction contract or a construction contract is a legally binding, written agreement between a business or homeowner and a contractor that summarizes the terms and conditions of the construction or work to be done, usually the building or renovation of a home. The contract can be drafted by the homeowner, contractor, supplier, or by a certified legal professional. A solid building construction contract provides outlines each party's responsibilities and provides a framework for dispute resolution. Having a contract in place helps avoid wasting time, money, and resources.  

There are many types of building construction contracts that can be customized to meet your specific needs. A contract can be general or describe specific terms of the contract like payment terms, the length and a detailed timeline of the project, the scope and depth of the project, and the legal obligations of each party.

Benefits of a Building Construction Contract

By entering into a contract, buyers, property owners, contractors, subcontractors, and construction firms are fully aware of each party's expectations regarding performance, materials, schedule, and finances. Having a concrete building contract in place before work starts can help avert disputes because it defines a process for addressing them if they arise, reducing stress in an already stressful situation.

A construction contract also protects the rights of both parties. Protections include preparations for delays and mistakes, contract and price disputes, and liabilities from work-related incidents. Both parties should consider the following before entering into a legally binding agreement:

  • Ensure the contractor has a license.
  • Ensure the contract is insured for contractor's risk and workman's compensation.
  • Conduct research, check references, consult the Better Business Bureau (BBB) to make sure the contractor is reputable.
  • Fully review any contract provided to ensure it is precise and clear.
  • Consult an attorney to review and explain the contract and make sure that it complies with state laws and regulations.

Common Types of Construction Contracts

There are several types of construction contracts, each designed to allocate risk, responsibility, and reward differently depending on the project’s scope and complexity. Choosing the right contract type can significantly impact cost control, scheduling, and dispute resolution. The main types include:

  1. Lump-Sum (Fixed Price) Contract – The contractor agrees to complete the project for a fixed total price. This approach benefits the property owner because costs are predictable, but it places risk on the contractor if actual costs exceed estimates. It’s ideal for projects with clear designs and specifications.
  2. Cost-Plus Contract – The client reimburses the contractor for all construction-related costs plus an additional fee or percentage for profit. This type is flexible but can lead to less price certainty. It suits projects with evolving designs or uncertain scopes.
  3. Time and Materials (T&M) Contract – Contractors are paid based on actual time spent and materials used, plus a markup. T&M contracts are suitable for smaller projects or those with undefined scopes but require close oversight to prevent overspending.
  4. Unit Price Contract – The price is based on predetermined rates for each unit of work (e.g., per cubic yard of concrete). This model allows adjustments as quantities change, making it useful for infrastructure and public works projects.
  5. Guaranteed Maximum Price (GMP) Contract – Sets a maximum project cost that cannot be exceeded. If costs come in lower, savings may be shared between owner and contractor. GMP contracts provide flexibility while limiting financial risk.

Each type offers distinct advantages depending on project complexity, budget, and desired level of cost predictability.

Consequences of Not Using a Builder's Contract 

Without a written agreement, both parties risk spending more money, time, and resources, as well as legal ramifications. There are bound to be disputes without the use of a construction contract. Some of the most commonly disputed aspects of a construction contract include issues with payment, the scope of the work completed, and length of time to complete the project.

Homeowners also might not get quality work completed on time, and if the contractor doesn't have scrupulous billing practices, they might end up overpaying. Contractors and suppliers, on the other hand, risk not being paid and fronting the cost of the work until payment is received. Contractors also risk losing his or her license. 

Legal Requirements and Risk Management in Construction Contracts

A well-drafted construction contract must comply with state and local construction laws to be enforceable. Legal requirements often include:

  • Licensing and Permits: Contractors must hold valid licenses and obtain necessary building permits before beginning work.
  • Insurance and Bonding: The contract should outline proof of liability insurance, workers’ compensation coverage, and, where required, performance or payment bonds.
  • Change Order Procedures: Clearly define how design or scope changes will be approved, priced, and documented.
  • Safety Compliance: Contractors must follow OSHA and state safety standards to protect workers and the public.
  • Warranties and Quality Standards: Specify workmanship warranties and materials standards to ensure lasting quality.
  • Termination and Default Clauses: Define what constitutes a breach and outline steps for termination or dispute resolution.

Failure to meet these legal standards can result in penalties, revoked licenses, or project shutdowns. Including these elements in your construction contract helps minimize financial and legal risk while keeping all parties accountable.

Building Construction Contract Contents

Spelling out the specifics of the contract in its entirety, the terms and conditions section is one of the most important parts of the contract. Regardless of the type of contract, there are certain provisions and guidelines that must be included in the construction contract. A building contract covers the following:

  • Contract agreements and contracts - essential components of the contract documents include the main and supplementary documents to be attached or referenced. Obligations, responsibilities, and duties of both parties are also included in this section.
  • Statement of work - a description of the work to be done, including a process for sourcing materials and assessing the quality of the work
  • Special or specific conditions - the process for changing orders, designs, and materials
  • Construction schedule - a description of the timeline of the project, expected completion date, process to manage delays
  • Construction costs - final price, payment schedules and amounts, and Contract Price Dispute Resolution clause
  • Compliance - for the contract to be valid, it must comply with the laws and regulations of the state where the work will be done.
  • Arbitration - the contract should include provisions addressing the resolution of disputes. Dispute resolution options include mediation, arbitration, or court involvement.
  • Signatures of both parties and date signed

To ensure you're starting your project on a good foot, both you and the other party should consult with a qualified legal advisor prior to signing the contract to ensure it covers all applicable legal requirements.

Managing Payment and Performance in Construction Projects

Payment structures are often one of the most contentious aspects of a construction contract. To avoid disputes, it’s essential to clearly specify:

  • Payment Schedule: Define milestones or phases tied to specific deliverables or completion percentages.
  • Retainage: Many contracts allow the owner to withhold a small percentage (typically 5–10%) until the project is fully completed and inspected.
  • Performance Benchmarks: Include measurable quality and timeline expectations to ensure accountability.
  • Dispute Resolution: Specify mediation, arbitration, or litigation procedures before legal action can be taken.
  • Recordkeeping Requirements: Contractors should maintain transparent documentation of materials, labor hours, and invoices to justify payments under cost-based or T&M agreements.

Proper payment and performance management ensure transparency, prevent project delays, and maintain trust between the parties. For high-value projects, owners often hire independent auditors or project managers to verify progress and payment requests.

Digital Tools and Modern Contract Management

Modern construction projects often use digital construction management platforms to streamline contract creation, document sharing, and change tracking. These tools provide:

  • Centralized digital storage for contracts, drawings, and change orders.
  • Automated alerts for deadlines, approvals, and payment milestones.
  • Transparent tracking of modifications and correspondence.
  • Secure access for stakeholders, including subcontractors and inspectors.

By digitizing contract workflows, owners and contractors reduce miscommunication, ensure version control, and maintain legal records that can be crucial in case of disputes or audits.

Frequently Asked Questions

  1. What is the main purpose of a construction contract?
    A construction contract outlines each party’s obligations, costs, and rights, ensuring that the project is completed on time, within budget, and to agreed standards.
  2. Which type of construction contract is best for large projects?
    For large or complex projects, a Guaranteed Maximum Price (GMP) or Cost-Plus contract offers flexibility while managing financial exposure.
  3. Are construction contracts legally required?
    While verbal agreements can be valid in some cases, written construction contracts are essential to enforce terms and protect against liability or payment disputes.
  4. What should be included in a construction contract?
    Essential terms include project scope, payment schedule, timelines, warranties, dispute resolution procedures, and signatures of all parties.
  5. Can I use a template for a construction contract?
    Templates can be useful starting points, but every project is unique. It’s best to have an attorney review your construction contract to ensure compliance with state laws and industry standards.

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