Key Takeaways:

  • Definition: Engineering contracts are legal agreements defining project scopes, payment terms, timelines, and termination clauses.

  • Types of Contracts: Common types include lump-sum, measurement, and cost-plus contracts.

  • Scope of Work: Clearly outlines deliverables, timelines, and exclusions.

  • Payment Terms: Can include fixed costs, milestone payments, or cost-plus arrangements.

  • Termination Clauses: Protect against project disruptions or breaches.

  • Key Components: Include risk allocation, warranties, and compliance with laws.

  • Benefits: Streamlined project management, reduced disputes, and clear accountability.

  • UpCounsel Advantage: Access to experienced attorneys for contract drafting and review.

Engineering contracts are legal agreements between a business and an engineering company detailing services promised, and payment for those services. 

What Is a Contract?

Contracts are agreements in which a person or business agrees to specific terms and conditions that can be legally enforced. In a contract, responsibilities and obligations are outlined and agreed upon by the two parties involved. 

Four Functions of Engineering Contracts

Engineering contracts cover four particular issues of an agreement between an engineer and the company they are going to work on a project for. 

These functions are:

  • 1. Scope of work
  • 2. Period of performance
  • 3. Payment
  • 4. Termination

Engineering contract templates can be found online.

Scope of Work

The first purpose of the contract is that it clearly lays out what is expected of the contracted engineer. To be completely clear, the company proposing the work should outline each task that is part of the project and provide deadlines. They should also be clear about their vision for the project and the end goal. Any parts of the project that should not be handled by the contracted engineer should be clearly stated in the contract. 

Risk Allocation in Engineering Contracts

Engineering contracts often include provisions to allocate risk between parties. These provisions define who is responsible for unforeseen circumstances such as material shortages, delays, or defects. Common risk allocation strategies include:

  • Specifying liquidated damages for delays.

  • Allowing for force majeure clauses to protect against uncontrollable events.

  • Mandating insurance coverage for certain risks.

Properly structured risk allocation minimizes disputes and ensures smooth project execution.

Period of Performance

Engineering contracts should give the expected time frame for the project and a deadline for total completion. Companies usually provide payment for the project at its beginning, so it is especially important to set deadlines in a contract. 

Payment

Contracts make sure that products and services are paid for in a timely manner. An engineering contract should outline when payments will be received, from whom, and how much, as well as instructions for invoicing. Some projects with a longer time span will be paid in installments at preset milestones in the progress of the project. If this is the case, the contract should lay out these milestones and payment amounts.

Cost-Plus Contracts

Cost-plus contracts reimburse the contractor for all project costs, plus an additional percentage or fixed fee as profit. They are beneficial for projects with uncertain scopes or durations, such as innovative engineering solutions.

Advantages:

  • Flexibility for projects with evolving requirements.

  • Transparency in cost reporting.

Disadvantages:

  • Higher financial risk for the client due to less predictable total costs.

  • Requires detailed record-keeping to justify expenses.

Termination 

Engineering contracts usually contain termination clauses. These types of clauses specify how, and for what reasons, the contractor or customer can terminate the agreement.

Valid reasons for termination include:

  • Convenience issues that prevent project progress or completion
  • Natural disasters

If one of the parties involved in the agreement breaches the contract or defaults on a part of it, the engineering contract should outline how such an event should be handled. 

Warranty and Liability Clauses

Warranty clauses in engineering contracts ensure that the contractor stands behind the quality of their work. These typically cover:

  • Structural integrity for a specified period.

  • Performance benchmarks for equipment or systems.

Liability clauses protect both parties by defining limits on damages and excluding indirect losses. Having these clauses ensures accountability while protecting against disproportionate legal claims.

Lump-Sum Contracts

A common type of engineering contract is a lump sum contract, also called a fixed price contract. This type of contract requires the contractor to agree to perform the specified work outlined in the contract for one fixed price.

Lump-sum contracts have a fixed price for the work promised and that price is only allowed to change under a change order. For a change order to take place, the client and the contractor need to determine additional work to be performed and require additional payment or remove some of the work originally agreed upon and settle on a lower payment. If the client and contractor have agreed on a clear vision and schedule for the project, a lump sum contract will likely work well for their agreement.

Some advantages of a lump sum contract are:

  • They offer fewer risks financially for the customer because they can budget for the fixed cost and not worry about it changing
  • There is less supervision needed for the contracted work because a clear schedule has been set
  • They encourage efficient work by the contractor to get done earlier and to achieve a better pay rate

Some disadvantages of a lump sum contract are:

  • If changes to the contract are needed it can be expensive and complicated
  • The design plans need to be definitively set before writing the contract
  • Fixed payment amounts can encourage contractors to choose cheaper materials and methods to increase their profit

Time-and-Materials Contracts

Time-and-materials (T&M) contracts are ideal for projects with unpredictable scopes or variable workloads. The contractor is paid based on actual time spent and materials used.

Advantages:

  • Flexibility to adapt to changing project needs.

  • Suitable for research and development phases.

Disadvantages:

  • Potential for cost overruns without strict oversight.

  • Requires meticulous tracking and billing.

Measurement Contract

Another common type of engineering contract is a measurement contract, also called a re-measurement contract or a measure and value contract. This type of contract includes a Bill of Quantities (BOQ) that the employer provides when the engineering design can be explained in detail, but the quantity of work cannot. 

As a project is worked on, the contractor can create a BOQ quoting each item used in the project. These will have unit rates and prices that will be added together to determine the total price for the project. The contract will quote the price of the project based on the BOQ.

Compliance and Regulatory Considerations

Engineering contracts must ensure compliance with local laws and regulations, including:

  • Adhering to safety standards, such as OSHA in the U.S.

  • Following environmental protection laws.

  • Obtaining necessary permits and licenses.

Including these considerations prevents legal issues and ensures smooth project approval.

Frequently Asked Questions

What is the main purpose of an engineering contract?

It outlines project expectations, timelines, payment terms, and responsibilities to ensure mutual agreement and legal protection.

How do lump-sum contracts differ from cost-plus contracts?

Lump-sum contracts have a fixed total price, while cost-plus contracts reimburse all expenses plus a profit margin.

What should be included in the scope of work?

Detailed descriptions of deliverables, timelines, exclusions, and any assumptions about the project.

Why are termination clauses important?

They define acceptable grounds for ending the contract and provide a roadmap for dispute resolution.

How can I ensure compliance with regulations in an engineering contract?

Include clauses specifying adherence to safety, environmental, and legal requirements, and outline penalties for non-compliance.

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