A construction contract is a mutual or legally enforceable agreement between two parties based on written policies and criteria. There are one or more property owners and one or more contractors participating. The owner, sometimes referred to as the ’employer’ or the ‘client,’ has complete authority to determine the type of contract to be adopted for the construction of a specific development and to establish the terms and conditions of a legally binding contract. A construction contract is an essential document since it specifies the job scope, risks, responsibilities, and legal rights of both the contractor and the owner. In this article, what are construction contracts, we take a look at the process involved and the options available to you.
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Can you use a ready-made construction contract?
Construction contracts can be Standard form, modified standard form or completely bespoke.
The Joint Contracts Tribunal (JCT), the Royal Institute of British Architects (RIBA), the Institution of Civil Engineers (ICE), and others have developed a number of standard contracts, subcontracts, warranties, and appointment agreements for the construction industry. Such agreements can be advantageous since they have a history of use between parties and their precise meaning has been established in court.
Since English law does not mandate a particular form for contracts, the parties determine the terms and, ultimately, the risk allocation. Standard Form Contracts (SFC) aim to reduce the time and expense associated with contract negotiation.
Modifications to typical contracts (modified standard form) should be approached with reluctance and prudence, since they can upset the risk balance and influence the original intent.
Custom-written or bespoke contracts are frequently deemed unfavourable due to the possibility that they do not sufficiently or fairly account for all circumstances and their lack of case law precedent. However, their ongoing use reflects how restrictive some segments of the industry view standard contract forms to be.
What are the different types of construction contracts?
There are a number of different types of contracts found in construction. They can broadly be divided into 4 types:
Fixed Price Contract
Under a fixed price contract, the project owner and the contractor agree on a single lump sum payment as the contract’s basis. As the name suggests, the price is defined and agreed upon prior to the start of work, with the owner agreeing to pay the contractor a predetermined amount. This amount will cover all materials, equipment, labour, and overhead costs. The estimation method for construction costs is critical. If you price your products too low, you risk losing money on your business.
Frequently, fixed-price contracts will stipulate how the payment will be made, however it is standard practise to have staged payments at specific weeks (such as biweekly or monthly payments) or when the project reaches milestones.
The upside of this type of contract is the opportunity to create a respectable profit if you price things accurately and are able to work quickly without encountering any unforeseen issues. Nevertheless, if unanticipated expenses are made, the error could quickly become pricey.
Fixed-price contracts can be quoted on a cost-per-square-metre basis, which is not always indicative of additional requirements that may arise once the work started. Under a fixed-price contract, if an additional building control requirement causes a delay in the project, you may be compelled to pay a fee for each week you exceed the specified deadline. Reviewing the contract terms to prevent fixed penalties wherever possible is prudent.
Contracts with fixed prices typically contain a change order mechanism. Prior to completion, any additional work or materials must be approved by the project owner in line with a documented protocol. Adding them to the contract will take more time, but it will prevent you from losing money in the future due to changes.
Cost-plus contract
The client is responsible for all project costs, including labour and materials, under a cost-plus contract. The consumer will pay an additional price to cover the contractor’s expenses and profit (either a flat rate or a percentage of the total project cost).
Time and materials contract
This is the most common form of contract for domestic projects, such as home kitchen extensions. In this instance, the contractor will prepare an estimate for the work to be performed based on the material costs and completion time.
This type of contract is usually advantageous for both parties, as the cost is established prior to the commencement of work and the contractor gets compensated fairly for all labour and materials required to complete the job. From the perspective of the project owner, however, there may be unaccounted-for costs and extras that develop during or after the conclusion of the project.
In certain time-and-materials contracts, especially when not all labour or supplies can be predicted in advance, a “guaranteed maximum price” (GMP) ensures that the budget will not exceed a defined amount. Again, this may result in a loss of profit if the project reaches the GMP without being completed; therefore, it is crucial to generate an accurate estimate from the bidding stage onward.
Unit Pricing Contracts
Contracts using unit pricing, break down the project’s costs into measurable units. Typically, this split is based on the tasks or scope of work and the materials required to execute those tasks.
What are the basics of a construction contract?
The following should be included in a typical construction contract:
Contact Details
Your construction contract should include the names and/or contact details of the contractor and client. This includes the client’s name, business name (if applicable), phone number, email address, and the address of the residential or commercial property where construction work will be performed.
In addition, it should contain the contractor’s name, business name, phone number, email address, and business address, as well as any appropriate licence and insurance numbers.
Your contract should contain a project title that appropriately reflects its scope. If you are constructing a conservatory, for instance, the contract could be labelled “Conservatory construction.” The construction contract should also include a description of the project’s scope.
If applicable, your project description should also include a list of any restrictions (such as building regulations) or licences required to execute the project correctly.
Proposed work schedule with timeframe
You must describe the anticipated duration of your building project. Ensure the contract’s effective date, the project’s start date, and the estimated completion date are stipulated. In addition, the contract should clarify what will happen if you are unable to complete the task by the estimated completion date. For instance, if the below-described work cannot be completed on the specified date, the Contractor will submit a revised completion date with a minimum of 24 hours’ notice.
Expenses and payment terms
Cost estimate and payment schedule are two of the most important details to provide in your construction contract.
Send a cost estimate to your client before creating the contract to ensure you are on the same page. Include a payment schedule and this cost estimate in your construction contract.
Before beginning work, you should always require a non-refundable deposit for payment. Then, a payment schedule based on project milestones can be created. You should also make a statement on unanticipated expenses.
Clauses regarding the cessation of work and payment for services rendered
A stop-work clause allows you to terminate the project if you have not been paid. The stop-payment clause allows the client to withhold payment if the project’s milestones are not met or the work is not of the agreed-upon quality. You should add both clauses for assurance.
Force majeure
Force majeure is a contractual phrase that absolves parties of responsibility for unanticipated and unavoidable catastrophes that disrupt the expected course of events and prohibit them from performing their obligations. Typically, these clauses cover both natural and man-made catastrophes.
Change order agreement
A change order agreement allows either party to deviate from, alter, or supplement the original contract by the execution of a written document. If circumstances change in the future, including this agreement will allow you to amend the project’s scope or contract conditions swiftly.
Warranty
Your client must be certain that you will stand behind the calibre of your work. And that if there is a problem with the quality of the project, you would accept responsibility and fix it.
A warranty offers your client peace of mind by ensuring the quality of your work for a predetermined time period (typically one year). The majority of clients will not hire a contractor without a warranty. Consequently, it must be included in the construction contract.
Signatures
A contract has no legal effect unless both parties sign it. Ensure that you and your client have both signed and dated the building contract.
How we can help
We have a proven track-record of drafting construction contracts from small residential developments to vast commercial projects. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
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How to Contact Our Construction Solicitors
It is important for you to be well informed about the issues and possible implications of a construction contract. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Construction solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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