The construction industry is heavily dependent on contracts. This is because there are a lot of players involved in a construction project: Clients (those who “buy” the construction works), the contractors (those in charge of the works), the subcontractors (those to whom certain parts of the works will be delegated), the professional consultants (the experts), and the suppliers (where materials and equipment come from).
Depending on the type of building which will be delivered in the end, a wide range of areas are also covered: design, engineering, management, building, warranties, and guarantees – among others. To sort things out, a written contract must be put in place. It sets forth the parties’ obligations to each other and therefore determines how risks will be shared or divided on the project.
Handshake Agreement vs Well-Written Contract
What is usually called a construction contract is the contract between the employer/client and the contractors. It does not have to be reduced to written form for it to exist or operate. Once you and your client agree to have construction project performed and you start the work, there is a construction contract that exists.
However, working on a handshake agreement can be very risky. With a mere oral contract, there are no written terms and the terms that control are defined by the parties’ negotiation correspondence, the course of performance of the contractor, and the limited default rights applicable by operation of law.
On the other hand, not only a written and signed contract is tangible proof of trust between you and your client, but it also provides a clear roadmap at the start of the project of how the involved parties will proceed to carry out the work. In summary, here are the benefits of working on a well-written construction contract include:
- Communication: The preparation and negotiation of a contract assist with clear communication.
- Expectations: A contract can ensure the owner-client has responsible expectations.
- Accuracy & Preventing Disputes: A contract is the best record of the understandings and agreements between the parties, which can prevent disputes in the future.
- Adaptability: A well-written contract should be able to be used and adapted for years to come.
- Relevance to Worker’s Lien Rights: A contract should include the required “Owner Notice.”
- Strengthening A Company’s Legal Position: Below, I have set forth just a few of the many types of contract provisions that strengthen a company’s legal position when a dispute or lawsuit arises.
Key Elements of a Construction Contract
The terms and items which must be present in a written construction contract often depend on the complexity of the project. However, every construction project should address the following items:
- Price, including whether it will be calculated as a fixed fee, cost plus, or cost plus with a guaranteed maximum price.
- How changes in the character of the work, contract time, or contract price will be handled (change orders).
- The order of performance and triggering of events.
- The time of performance of each step in the contract.
- Whether delay damages will be assessed for late completion and, if they are assessed, whether they will be assessed as actual damages or liquidated (an agreed-upon amount) damages.
- Sureties, including whether performance and payment bonds will be required.
- The terms and conditions of any performance and payment bonds.
- Warranty obligations.
- How notices between the parties will be handled.
- How disputes between the parties will be handled or conducted.
- How liens on the project will be handled or waived.
- How interim progress payments will be requested and disbursed, including what conditions must be met to trigger a disbursement.
- Insurance, including what parties will be required to carry insurance, what occurrences must be covered by insurance, and what are the parties’ rights to claim the other party’s insurance policies.
- How the project will proceed in the event of a serious dispute arising during the project.
- Firing and termination provisions that govern how situations of default will be handled.
- Whether certain items in the contract will be considered and how allowances will be handled.
Tips for Successful Contract Management
Ensure Consistency in Different Contracts
An important concern on construction projects with numerous parties and contracts is ensuring that the different contracts are consistent with each other. For instance, if a subcontractor is subject to same provisions as the contractor, then they should have a copy of the upper-tier contract being applied to them.; otherwise, the subcontractor agrees to a set of terms to which it has not seen.
Have a Good Foundation Early On
Relevant information about the project held in an efficient construction management software system can help you tender effectively, manage procurement by tracking prices, and source reliable suppliers and subcontractors by monitoring best practice.
Establish Good Relationship with Clients
Construction projects typically evolve as customers change their minds. Construction management software can help keep your contract variations up to date and help in negotiations.
Stay on Top of Your Retentions
Over a long and complicated project, it can be easy to let data slip away – especially builder retentions. Builder retentions can be difficult to keep track of their status, and that can be costly. Once again, good construction management software like Bizprac should enable you to create a job to set up your builder retentions; you have the ability to set-up the tiered breakdown as agreed in the contract.
Once your builder retentions are set up, they will calculate automatically and appear on invoices. The contract amount is automatically updated to reflect all retained monies.
Ultimately, keep in mind that signing the contracts is just the beginning of the construction endeavour. You have to monitor the progress taking place on all deals and ensure that everybody is complying with what is agreed – and if not, give proper notification of that. To minimise the risk of disputes, you need to notify the client properly that there is a problem. Again, a well-written contract communicated across the key players will help ensure that everyone will fulfil his or her role and duty according to what is agreed upon.