Understanding The Key Terms In Construction Contracts

Being able to create a good transparent construction contract is a skill expected from every builder and contractor to protect themselves and the clients. Apart from the actual construction work, a construction contract is definitely one of the most critical aspects of the project. Most of the contracts start with a basic list of items that are adapted based on each project, and further details are added depending on the complexity of the project.

There are many types of contract like Lump Sum, Time and Materials, Unit Price, Cost Plus, and GMP. However, there are a few basic elements that must be included in every construction contract regardless of the type. These are elements are:

• Must offer a product or service in exchange for compensation.
• Scope and quality requirements of the product and services offered must be mentioned in detail.
• Time required to deliver the product of service.

Now that you know the importance of construction contracts along with the basic elements associated with them, let’s take a look at the key terms in these contracts.

Top 9 Key terms in Construction Contracts

1. Contract Agreement

This agreement is established between the project owner and the main contractor that provides the construction services. The agreement document specifies a date and parties participating in the construction project. The document contains a set of clauses defining the project scope, terms and conditions of the agreement.

2. Schedule or Calendar

It consists of distributing all the construction activities within a period of time. The schedule may be altered if any issues are encountered during the construction process. The schedule allows the client to get an idea of when the project will be completed. This document also serves as a guideline for the contractor for scheduling the work. Visual representations are always a plus when talking to clients, so creating a Gantt chart is always helpful.

3. Statement of Work

This document is also referred to as the scope of work and describes all the construction activities required to complete the project. Some of these activities include:

• Who is responsible for certain activities?
• How will the task be completed?
• What materials will be required?

Creating a scope of work for the construction project is always helpful during the bidding process. However, there are certain types of contracts that can be created even without a completed scope.

4. Terms and Conditions

This section contains all the responsibilities corresponding to the owner and the contractor. This section includes the legal framework for the overall contract: there are specific terms regarding liens, penalties, arbitration rules, withholdings, procedures for claims, and even resolution of disputes. The most important part of this item is establishing the rights and responsibilities of each party.

5. Contract Laws

This includes all governing laws, liens requirements, arbitration procedures, insurance, claim procedures, liquidated damages, final completion, and substantial completion requirements. This section can also provide procedures to follow when the agreement with the contractor is suspended or terminated beforehand.

6. Specifications

The specifications portion of the contract is where all the technical data and requirements are included. There should be a list of specifications for every construction task, including materials, procedures, techniques, and equipment expected to be used. These specifications are open for negotiation, and should be discussed between the parties while the contract is being developed. Specifications that must be altered or changed are handled under the change order conditions in the scope of work.

7. Drawings and Quantities

There is a document known as the bill of quantities, which includes several lists of materials, costs, labour and trades that will be part of the project. This document is useful when contractors are preparing their bids.

Another essential element that every contract should include is a set of project drawings and plans. This can be the actual blueprints of the project, as well as simpler drawings that provide a graphic representation of specific details.

8. Cost Estimate

This document provides a breakdown of all items required for project completion, and their costs. The cost estimate can be detailed per item in a format that combines specifications and costs, or it can be given as a lump sum where items are not specified individually.

9. Insurance Coverage

This part is essential, especially for the owner: it provides a guarantee that the contractor is financially capable of performing the work, under the terms and conditions specified in the contract.

As mentioned before, there is no such thing as a too detailed contract: some contracts include specifications for security, staffing requirements, excusable events, etc. Every contractor should consider adding documents that improve the clarity and scope of contracts. The goal of a contract is establishing the terms to solve any claims or issues that might arise during the project.