A construction contract is a binding agreement between a client and a contractor that details the terms of a construction project. It spells out the scope, deadline, and cost of the work, including who will pay for materials and other service-related expenses. A well-devised construction contract is fundamental to the client-contractor relationship. Without one, issues that come up such as delays or unexpected costs can lead to disputes between the parties, and in some cases, litigation.

Construction Contract Description

A construction contract is a document that formalizes a working relationship between a contractor and a client who hires them to perform construction services. These contracts are often awarded to general contractors who oversee the work from beginning to end. Among other information, a construction contract will detail the following:

• Service obligations
• Contract length
• Compensation
• Expense reimbursement
• Permits and licensing requirements
• Liability insurance
• Early contract termination

When it Should be Completed

Large Projects

Construction contracts for larger projects are completed following a bidding process, before the work begins. Contractors will first evaluate the job, estimating completion time and material/labor costs. They will then prepare a bid and submit it to the client for approval. If accepted, the parties will negotiate final pricing and scheduling terms before committing themselves to the project by signing the contract.

Small Projects

For smaller jobs and minor home renovations, the client will approach the contractor and inform them about what needs to be done. The contractor will quote a price and write a draft for the client’s review. Once both parties have negotiated and accepted the service terms, the construction contract will be signed to establish a binding agreement.

Retainage in a Construction Contract

Retainage is a percentage of payment withheld by the client to ensure the contractor fulfills their duties correctly. It gives the client security should issues develop and offers the contractor financial incentive to finish the project on schedule.

Retainage rates typically range from 5% to 10%, although exact amounts will vary depending on state law and whether the contract is for private, state, or federal construction.

Types (4)

Lump Sum (fixed-price)

With a lump sum contract, the contractor undertakes a construction project for a predetermined price, covering all service, material, and labor costs. The amount is fixed and cannot be modified to compensate for any setbacks or overages the contractor might face.

Should the actual construction costs be less than the initial estimate, the contractor stands to make a profit. However, if the project goes over budget, they could incur a loss.

Unit Price

A unit price contract is one where the contractor charges a fixed amount for each segment, or “unit,” of work, and the client pays only for the units they receive. If a project’s scope evolves as it’s being carried out, the contractor will add or subtract units from the final bill. This pricing structure benefits jobs where the total quantity of work is uncertain.

Cost Plus

Cost-plus, or “cost-reimbursement,” contracts require the client to pay for all expenses plus an amount designated for the contractor’s profit. The additional amount is typically a fixed fee or a percentage of the total contract price. While potentially lucrative for contractors, they must still provide a comprehensive estimate of the projected expenses, and the client must agree to the terms beforehand.

Time and Materials

Under a time and materials contract, the contractor estimates the project duration and quotes an hourly rate ($/hr). The client pays the contractor for each hour of labor and the cost of materials. Some contracts will include a “not-to-exceed” clause, which limits the maximum billable amount.

Sample

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