5 Critical Items in a Construction Contract

Contracts are a crucial part of the real estate industry.

Keep in mind that there are five items that must be in every construction contract that you sign.

A construction contract is an agreement that binds yourself and the owner in an agreement based on the project that you’re bidding on.

The construction contract is one of three items involved in a bid. These include the construction contract, line item sheet that is detailed project costs, and scope of work document that outlines every item within the line item sheet.

A standard construction agreement is called an AIA construction contract. This is an agreement between the owner, architect, and builder/general contractor.

There are several types of AIA contracts. A cost-plus contract will do construction without a guaranteed maximum price.

Let’s say you start a job and there are some unforeseen conditions on the job site, you would have a reasonable idea of how much you would bid the job for.

However, you understand that there are unforeseen circumstances coming.

Another option is a lump-sum contract. Let’s say that you see a job and make a bid on the project. You put a price label on that job. You must stick to the price that you bid, so it’s important to make sure not to under bid the job.

1. Scope

Define the scope on the work that you will be doing. What materials and services will you provide?

Additionally, it’s important to specify what you will not provide during the project.

This will prevent there being misunderstandings between all parties involved. Be sure to have an “exclusions provision” which will explain what is not included in your scope of work. This can save you a huge potential headache in the future.

2. Price

The price of the home should reflect the scope of work.

If you’re putting a lot of work into the project, this would be reflected in a higher sales price. If your construction costs are minimal, expect the sales price to be lower.

Whether you’re signing a cost-plus contract or a stipulated sum contract, the price must mirror the scope of work that you’re providing.

3. Payment

It’s important to define when you will be paid for your work.

Most contracts state that you will be paid within a certain period after submitting your invoice or payment application. Most contracts include a “pay-when-paid” provision.

This states that the subcontractor gets paid when the general contractor gets paid. If the owner doesn’t pay the contractor, then the contractor might not pay you.

If this is a provision in your contract, be prepared to deal with this if an issue comes up.

4. Start

Define specifically when the work will start. It could be on a day or because of a triggering event, like permit approval. It’s important for this to be clearly defined in your contract.

5. Completion

Will you be finished by a specific date or a certain number of days after you started work? This is up to you to decide.

It’s important that the contract you sign include when the completion of the work that must occur.

There are damages that could happen if you’re late on the job. These are known as liquidated damages, that could be paid if a party is responsible for a breach of contract that resulted in an injured party.

Consider these five critical items and it will help you negotiate a better contract for your next project.