Construction Contracts Provisions
Construction contracts are more than one size fits all. They can be as varied as the buildings/projects that they cover — some are just a single-page proposal, while others have hundreds of pages and sections. Certain provisions should be included in any contract if you are a building owner or general contractor. We have put together a list of ten(10) key contractual provisions based on our 25 years of experience dealing with construction contracts.
#1: SCOPE OF THE WORK
The first item on this top 10 list is the most important. How the parties describe the scope of work to be performed in a construction contract takes precedence above all else. The scope of work defines what a contractor must provide, as decided by an owner, in exchange for money. This includes specifying materials, labor, equipment, and services required – anything not included in writing will not be provided (or only supplied if the Owner agrees to extra payment).
If the scope of work in your contract does not reflect what you and the contractor expect, it may cause issues like change orders, budget overruns, or disputes. The scope can be defined by plans, specifications, and other documents that come with or are identified in the contract. Make sure to check these documents carefully for accuracy and completeness. The contract should also include what is not part of the agreed scope of work, hopefully providing clarification for both parties. Some items may be provided by the Owner or through other contractors to the Owner.
The construction project cost is based on the pre-arranged scope of work. If any changes or additions are made to the original plan, the price will also increase.
In every business, there are specific industry standards that provide price options in contracts:
- There are three main pricing structures for construction projects: fixed price, cost plus, and unit pricing. Fixed price is also known as stipulated or lump sum. This type of pricing offers a set fee for the contractor. Cost plus contracts feature reimbursement for the contractor’s actual costs incurred during the project, plus an additional fee, which may or may not include a maximum amount or not to exceed amount. Under unit-priced contracts, payment is based on measured quantities of work performed multiplied by pre-established prices per unit.
Payment terms spell out when payments are due, what is necessary to make the payment, and what happens if someone does not pay. Typically, regular payments are made while construction is happening, with one or more final payments once the project is mostly or completely done. Retainage (money that is held back) and release of retainage can also be included.
#4: TIME IN CONSTRUCTION CONTRACTS
Your construction contract should account for the following time considerations:
- The work will begin either on a specified date or after a particular event, like once the construction permits have been issued.
- The work should be completed either as of a set date or will last a particular duration. Completion is verified by a third party, such as an architect, or issuance of a certificate of occupancy by a building inspections office.
- In what conditions will the time for performance be extended? A few examples are weather delays, plan revisions, and circumstances beyond the contractor’s control.
- If construction is delayed, are there any monetary consequences? If so, consider the inclusion of liquidated damages in the contract. Liquidated damages are an amount agreed to in advance for delayed completion. They are usually specified as a daily amount and must be a reasonable estimate of the actual costs of delay.
#5: HANDLING CHANGES TO CONTRACTS
Changes are common even after construction has already started. These changes, called change orders, can be caused by the decreased or increased scope of work because of the Owner’s wishes or matters discovered during construction.
In order to stop any miscommunication between you and the builder that could lead to future problems, it is the best practice to have all change orders in writing and signed by the parties. This way, both parties are held accountable, and an agreement is reached regarding the new details regarding scope of work, price, and time for completion covered by the change order.
#6: CONCEALED OR UNEXPECTED CONDITIONS
It is challenging to estimate anomalies, such as hidden rocks or unsuitable soil found while excavating, beforehand in a construction contract. These issues often appear during renovations or excavating when unknown conditions are discovered.
A concealed or unexpected conditions clause, allows for a price increase that is still considered fair. This is because the scope of work and price were set based on conditions that the contractor was aware of before any work started. The specifics as to what qualifies as a concealed condition and what procedures should be followed once such conditions are discovered may be detailed in the clauses themselves.
Before starting a construction project, it is important to have requirements in place for the insurance each party is required to maintain during and after completion of the project. This includes specifying who is named as an insured party, the type and amount of coverage needed, and how long coverage must be maintained. It is also crucial that insurance on the construction work itself goes into effect before commencing work and remains active until permanent property insurance kicks in for the completed project. Builder’s risk insurance, as it is commonly known, may be obtained by builders or owners and protects against loss during the construction process from risks such as fire, windstorm, theft, etc. It does not insure against defects in workmanship. For this reason, it is always advisable to have the builder and owner consult with insurance professionals to review terms before agreeing to coverage.
#8: CONSTRUCTION WARRANTY
In Arizona construction warranties are expressed by the builder and manufacturer of materials (e.g. shingles, HVAC equipment) included in the work, or they may be implied through law. An example of an implied warranty backed by law is the duty of a contractor to perform work up to code in a proper and timely manner– this is known as a warranty of workmanship.. Another type of implied warranty is one made by both the seller and builder when constructing a residence—it is called an “implied warranty of habitability” and covers things like defects that make living conditions unsafe or uncomfortable. In some situations, these types
of Warranties may not exist
Builders often offer a one-year repair or replacement warranty. In Arizona, pursuant to the Registrar of Contractors, there is a warranty of two years on all licensed construction work. Express warranties from builders and manufacturers should be carefully considered for their coverage terms, duration, inclusions, and exclusions.
#9: TERMINATION OF A CONSTRUCTION CONTRACT
Many owners and builders include terms in their contracts that allow for more certainty and options when terminating the contract than what is provided by general contract law. These termination clauses are usually for “cause” and/or “convenience.” For example, an owner may have the right to terminate a construction project at any time (i.e., without cause) if they so choose. Additionally, termination clauses will often address how the final payment to the contractor should be calculated, which can vary depending on the reason for the termination.
#10: DISPUTE RESOLUTION
Although people generally do not plan on disputes when they first start working together, it’s always a possibility. If there is no agreement in place, usually the only way to resolve differences will be through expensive and time-consuming litigation in court. However, another option is for both sides to agree to binding Arbitration instead. The arbitration process is usually much faster and can also be cheaper than going to court. Most construction contracts include provisions that say the parties must explore alternatives like mediation or other types of negotiation before considering arbitration or taking the case to court.
The above ten provisions are not an all-encompassing list of what should be included in a construction contract. Parties involved and experienced attorneys should consider the factors and circumstances unique to each project before deciding which terms are appropriate for the agreement.