Every construction project a company takes on is a job that needs to be completed for its client. While this may seem simple enough, there are several details that need to be ironed out before work begins so that everyone is on the same page and knows what the results should be.
The only way to do this effectively and efficiently is to create a construction contract. This contract is a legally binding agreement, for both parties, which establishes that at the end of all work listed, one party will receive remuneration from the other.
Although there are many construction contracts available, there are only a few that professionals prefer to use. The contracts that everyone seems to like best include the fixed-price or fixed-price contract, the cost-plus contract, the time and materials contract for when the scope is unclear, and the unit price contract.
The lump sum or fixed price contract involves one price for all project activities. These contracts typically include benefits and other incentives for early termination, while later termination will involve penalties. These contracts are best when the scope of the entire project is clear and the detailed schedule has been agreed upon by both parties. Most people use this contract when the builder needs to deal with risk and the owner doesn't want to be bothered with multiple change orders for unknown work. There are hidden costs in these contracts, as contractors must cover their risks somewhere.
A cost-plus contract states that payment will be made on actual costs, purchases, and any other actual expenses initiated during the project. These contracts should contain detailed information about a specific pre-negotiated amount that will cover any overhead expenses and any small profit the contractor wants to make.
There are a few different cost-plus contracts available and these include cost plus fixed percentage, cost plus fixed fee, cost plus guaranteed maximum price and cost plus guaranteed maximum price and bonus. These contracts are often used when the scope of the entire project is not fully known and the owner wants to have some control over what the contractor is charging. All of these contracts are difficult to control, as there is a lot of monitoring required to keep track of all the variables.
A time and materials contract is always used when the scope of the project is unclear. In this type of contract, both parties must agree on the hourly or daily rate, as well as any additional expenses that will obviously arise during the project. Costs in this type of contract are typically classified as indirect, direct, markup and overhead, and all need to be included. This contract is typically only used when the project is small and it is known how long it will take to complete.
A unit price contract is common, especially when the owner requests specific priced quantities during the bidding process. Unit pricing assures the owner that he or she is not experiencing price gouging and is instead being charged the prevailing rate for the item in question.
These unit prices can always be adjusted, in either direction, during a scope change, which makes it easier for both parties to reach agreement when a change order comes into play.
It's not difficult to write construction contracts, but it can be time-consuming. Some companies think that several employees can write them without any problem, but this is not the case because each one configures them differently while using different words. Any inconsistencies could void a contract if a major dispute occurs, or at the very least affect the bottom line.
There are certain guidelines that must be followed when drafting construction contracts and they are as follows:
- A logical layout and grouping of subjects. This is best planned in advance.
- Requirements for each subject must be clearly stated and all aspects must be covered.
- Appropriate language as well as punctuation must be used.
- No legal terms or phrases should be used at any time.
- Obligations should be listed as must and must rather than should or will.
- The quality of everything should be clearly defined, rather than stating that everything will be fine.
- Essential matters should be the focus to maintain brevity.
The purpose of these guidelines is to ensure that the extent of the work is known, what is required and what will be delivered, and what methods will be used.
Gone are the days of a simple handshake to confirm that everything is ok for the project to begin. Therefore, everyone needs to make sure they use a construction contract, or they could come out at a loss.
