Whether you're a contractor or a home or business owner, you need a construction contract to list each party's rights and duties clearly. A construction contract should include terms such as making sure the contractor has the proper licenses and insurance and that the owner knows that they could receive a mechanic's lien on their property if they don't pay.
Having a clearly defined construction contract helps both parties know what to expect upfront, so there are no surprises.
Types of construction contracts
Not all construction contracts are one-size-fits-all. They come in four different formats, depending on personal preferences and what the job entails. These types include:
- Fixed-price, or lump-sum, contracts. Providing a fixed price for the completed job, these contracts may include clauses for liquidated damages or penalties if the contractor completes the project after the scheduled completion date.
- Cost-plus contracts. These include the costs of materials plus the costs of labor. The “plus" could represent a fixed fee or percentage and could include a guaranteed maximum price so that the project fee has a cap. For projects with some uncertainty, such as the homeowner omitting details that emerge once work is underway, a cost-plus contract can help protect the contractor.
- Time and material contracts. As with the cost-plus contract, this type of document is beneficial for projects with a degree of uncertainty. However, the owner usually pays hourly or daily, without the “plus" fixed fee or percentage. The contractor may also put in a guaranteed maximum price so the homeowner has peace of mind about the project's overall cost.
- Unit-pricing contracts. Contractors often use these contracts when bidding, especially for work on federal projects. Unit pricing allows the owner to know that the contractor is charging a standard amount without a markup for specific units required for the project.
Elements of a construction contract
A general contractor construction agreement can have numerous clauses, but any solid agreement should contain some fundamental provisions. If you're not sure what to include, consider using a construction contact form or having a legal professional prepare the contract for you.
Standard construction contracts should have the following information and clauses:
- Name of contractor and contact information. Include the contractor's license number along with phone number, email address, and company address.
- Name of homeowner and contact information. In addition to the owner's phone number and email address, list the address of the property where work will be done and assert that the homeowner owns the property. Do a property search in the owner's county to verify ownership.
- Describe property in legal terms. Use the property description found in the deed on record in the county clerk's office.
- List attachments to the contract. This includes blueprints and any other specifications required for the job.
- The cost. List what the completed project costs and decide whether the homeowner will pay in several installments rather than just a down payment at the beginning. If the owner is paying installments, list the pay dates and amounts required.
- Failure of homeowner to obtain financing. If the homeowner fails to qualify for financing, describe how the homeowner can terminate the contract.
- Description of the work and the completion date. This allows the homeowner to know that there's a meeting of the minds between you. This clause fully describes what is being constructed and the exact or estimated date of completion. Mention that time is of the essence only if the homeowner requests it.
- Right to stop the project. This stop-work clause is necessary if the homeowner hasn't paid you. Also include provisions that explain how either side may terminate the contract.
- Right to withhold payment. The homeowner can refuse to pay an installment if workmanship is shoddy or if certain conditions exist.
- Remedies for breach of contract. Each party has the right to sue for breach of contract. List the state where either party must bring a lawsuit. Contractors should use the state where the company is located.
- Requirements for proper licenses, permits, and insurance. Contractors should check with their state to see what licenses they must obtain and make sure they have them. Secure liability and worker's compensation insurance, but check with a reputable insurance company to see if you should carry any other types.
- Unforeseen circumstances and acts of God. Provide for what happens if there are unexpected circumstances or acts of God, such as hurricanes, floods, or unavailability of materials.
- Inspection and access. This allows the owner to inspect the property during reasonable times and for the contractor to have unlimited access to the property.
- Change orders. If either party decides they want to deviate from the contract, provide that it is permissible upon submission of a written document approved by both parties and signed with the formalities required of the original agreement.
- Warranties. Contractors warrant that their work is free from defects, that they are performing in a “workmanlike manner," and that they will fix any defects within the time specifically listed in the contract.
- No liens by subcontractors. This clause protects the homeowner from getting a mechanic's lien from a subcontractor. The primary contractor should ensure that their contracts with subcontractors clearly define their liability should they fail to fulfill their duties under your contract with them.
- Amount of damages and limitation of liability. Both parties can agree upon damages due to late performance or other unforeseen problems.
- Disposal of all materials and condition upon completion. The contractors agree to get rid of excess and hazardous materials and to leave the property in “broom clean" condition.
- Signature and date by both parties. Notarization isn't necessary unless the state where the work is performed requires it.
A solid construction contract should contain all of the above clauses—and perhaps even more. Consult with a business attorney if you need help drafting your agreement.