What Are Construction Contracts?

Construction contracts are legally binding agreements between owners and builders outlining specifics about agreed-upon jobs. Among the details are the compensation that the builder receives and how that compensation is distributed.

Several types of construction contracts are used in the business, but certain ones are preferred by industry professionals. Contract types are often defined by how disbursement will be made and details about specific terms, such as duration, quality, and specifications.

Major contract types often have variations that allow you to customize them in order to meet your specific needs related to products or projects. The contract acts as an agreement between two or more parties  to execute construction works according to certain terms and conditions.

A construction contract may contain the following: 

  • General and special conditions of agreement 
  • Details and specifications of project work 
  • Time limits 
  • Payments 
  • Any penalties for delivery delays 

The contract also spells out each party's rights and obligations, and it's a valid, enforceable document.

Each type of construction contract has its own advantages and disadvantages with respect to the contractor and owner. Contracts are put into one of two major categories, depending on payment method to the contractor: price-based or cost-based.

Contracts are very important to the completion of a successful project. Having a solid contract is a crucial first step toward a finished job, no matter what you're constructing. The contract sets dates for the project as well as specifies the parties that will participate in the construction process.

Normally, the contract is between the owner of the project and a contractor or supplier who's providing the requested services. Several clauses in the contract define the terms, scope, and conditions of the agreement.

Varying site conditions may increase construction costs and lead to delays in the schedule. Usually, you'll find varying conditions in the first weeks of the construction project, which can affect the completion schedule with unanticipated problems and delays.

Escalation clauses are regularly used in construction contracts, especially large projects that may take at least one year to complete. However, even small and medium-sized jobs may call for escalation clauses with the recent  changes in gas and oil prices. When done properly, these clauses protect you from a price bump. Without them, you might face legal hassles related to a disagreement over cost.

Using a construction contract makes sense if any of the following apply to you: 

  • You're a contractor hired to renovate or build a property. 
  • You're the party hiring a contractor to renovate or build your property.

On any type of project, misunderstandings can happen. By having details outlined in advance in the contract, everyone can understand what's expected. A contract makes it clear, in writing, what each party's obligations are. Contractors know what to expect as far as payment goes, and clients are clear in regards to performance expectations.

Conditions of Construction Contracts

The conditions of a contract are terms that do the following: 

  • Defines each party's obligations and rights 
  • Details the relationship between the contractor and the owner 
  • Determines what actions take place if disputes arise between parties 
  • Specifies payment methods

The usual conditions in a construction project include general and special conditions of contract.

General conditions suit most projects. They're standard terms that include the following: 

  • Definition of the project 
  • Owner and contractor rights and responsibilities 
  • Project schedule 
  • Contract components 
  • Payment method 
  • Warranty 
  • Penalty for delays

Special conditions are any modifications necessary to fit the uniqueness of the project, so they make the contract more flexible in order to achieve the project's objectives.

Choosing the Type of Contract

Because each construction project has its own special set of circumstances, it's important to choose a contract type that best suits the job. The owner develops the process of contract selection, so he or she should consider the following factors when deciding on the type of contract:

  • Project objectives. The contract type should meet project objectives.
  • Constraints. All construction projects have constraints, so these constraints should be factored into the decision.
  • Delivery method. The project's delivery method determines the relationship between the involved parties, from the beginning to the end of the project.

Having a construction contract in place protects everyone involved, which is vital no matter the size of the job. 

If you need help with construction contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.