Updated on February 21st, 2023
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
- Expense reimbursement
- Permits and licensing requirements
- Liability insurance
- Early contract termination
When it Should be Completed
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.
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.
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.
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, 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.
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1. THE PARTIES. This Construction Contract (the “Agreement”) is made between:
Client: [CLIENT NAME] with a mailing address of [CLIENT ADDRESS] (the “Client”), AND
Contractor: [CONTRACTOR NAME] with a mailing address of [CONTRACTOR ADDRESS] (the “Contractor”).
WHEREAS, the Client intends to pay the Contractor for Services provided, effective [MM/DD/YYYY], under the following terms and conditions:
2. SERVICES. The Contractor agrees to perform the following for the Client: [LIST ALL SERVICE(S)]. Hereinafter known as the “Services.”
3. PAYMENT. In consideration for the Services to be performed by the Contractor, the Client agrees to pay $[AMOUNT]. The Contractor agrees to be paid in the following manner: [DESCRIBE PAYMENT METHOD/FREQUENCY].
4. DUE DATE. The Services provided by the Contractor shall be completed by [MM/DD/YYYY].
5. TERMINATION. This Agreement shall terminate upon the completion of the Services provided.
6. OPTION TO TERMINATE. The Client and the Contractor shall each have the option to terminate this Agreement at any time by providing [#] days’ written notice.
7. EXPENSES. The Contractor shall be responsible for all expenses related to providing the Services under this Agreement unless otherwise stated here: [REIMBURSABLE EXPENSES, IF ANY].
8. INSURANCE. The Contractor agrees to bear all responsibility for the actions related to themselves and their employees or personnel under this Agreement. In addition, the Contractor agrees to obtain comprehensive liability insurance coverage in case of bodily or personal injury, property damage, contractual liability, and cross-liability.
9. CONTRACTOR STATUS. The Contractor, under the Internal Revenue Service (IRS) code, is an independent contractor, and neither the Contractor’s employees nor contract personnel are or shall be deemed, the Client’s employees.
10. ASSIGNMENT. Neither the Client nor the Contractor may assign this Agreement without the express written consent of the other party.
11. LEGAL NOTICE. All notices required or permitted to be given hereunder shall be in writing and may be delivered personally or by Certified Mail – Return Receipt Requested, postage prepaid, addressed to the mailing addresses entered in Section 1.
12. INDEMNIFICATION. The Contractor shall indemnify and hold the Client harmless from any loss or liability from performing the Services under this Agreement.
13. GOVERNING LAW. This Agreement shall be governed under the laws in the State of [STATE].
14. SEVERABILITY. This Agreement shall remain in effect if a section or provision is unenforceable or invalid.
15. ADDITIONAL TERMS AND CONDITIONS.
[TYPE ANY ADDITIONAL TERMS & CONDITIONS HERE].
IN WITNESS WHEREOF, the Parties have indicated their acceptance of the terms of this Agreement by their signatures below on the dates indicated.
Client’s Signature: __________________________ Date: [MM/DD/YYYY]
Print Name: [CLIENT NAME]
Contractor’s Signature: __________________________ Date: [MM/DD/YYYY]
Print Name: [CONTRACTOR NAME]
Company: [COMPANY NAME]