A construction contract serves as a crucial legal document that establishes a binding agreement between the owner and the builder. It ensures that the executed job will receive a specific amount of compensation or clarifies how the compensation will be distributed. In the construction industry, where projects can involve substantial investments, complex operations, and multiple parties, having a well-defined contract is essential to protect the interests of all parties involved.
Construction contracts come in various types, each with its own distinct characteristics and advantages. Construction professionals, including owners, contractors, and builders, often have their preferred contract types based on the specific needs and circumstances of a project. These preferred types of construction contracts have emerged over time as effective solutions to address common challenges and achieve successful project outcomes.
The selection of an appropriate contract type depends on several factors, such as the nature and complexity of the project, the level of risk allocation desired, the degree of flexibility needed, and the budgetary considerations. Different projects may require different contract types to best align with their unique requirements and objectives.
By choosing the most suitable contract type, construction professionals aim to establish a fair and transparent framework that guides the execution of the project. They seek to ensure that the project is completed within the agreed-upon parameters, that the compensation is distributed in a manner that aligns with the parties’ expectations, and that potential risks and contingencies are appropriately addressed.
In the following sections, we will explore some commonly preferred types of construction contracts used in the industry. Understanding the characteristics and benefits of these contract types can help both owners and builders make informed decisions when entering into construction agreements. By selecting the right contract type, parties can establish a solid foundation for collaboration, minimize conflicts and disputes, and increase the likelihood of a successful project outcome.
Construction contract types are usually defined by the way, the disbursement is going to be made and details other specific terms, like duration, quality, specifications, and several other items. These major contract types can have many variations and can be customized to meet the specific needs of the product or the project.
Creating a good construction contract is a skill that every builder should know inside and out, whether he or she is a solo owner-builder or the head of a large construction firm. Although various contractors use different checklists when creating a contract, there are commonalities that should be followed no matter what form the printed contract takes. In most good contracts, the builder starts with the most basic of line items, adapting the contract to the complexity of the project.
Aside from the construction work itself, creating the contract is one of the most important parts of the project. The more detailed the contract the better; even items considered common sense shouldn’t be overlooked.
There are seven major areas to consider when developing your skills at creating successful contracts for your construction business.
Types of Construction Contract Documents
At the early stages of any construction project, the owner with his engineer or consultant prepares necessary documents for the tender process, which will be included in the contract. These documents are called contract documents.
- Invitation to Bid (ITB): This document is used to formally invite interested contractors to submit their bids for the construction project. It outlines the project details, scope of work, submission requirements, and any specific instructions or conditions.
- Instructions to Bidders (ITB): This document provides detailed instructions and guidelines to the bidders regarding the bidding process. It includes information about bid submission, deadlines, required documents, evaluation criteria, and any contractual terms or conditions.
- Bid Form: The bid form is a standardized document provided by the owner or project team, which the bidders fill out to submit their proposed prices and other relevant information. It typically includes sections for pricing, project schedule, proposed methodology, and any exceptions or qualifications to the contract terms.
- Contract Agreement: The contract agreement is a legally binding document that formalizes the relationship between the owner and the selected contractor. It includes essential details such as project scope, contract duration, payment terms, insurance requirements, dispute resolution procedures, and other terms and conditions agreed upon by both parties.
- General Conditions: General conditions are a set of standard clauses that define the overall rights, obligations, and responsibilities of the owner, contractor, and other parties involved in the construction project. These clauses cover topics such as project management, changes and modifications, warranties, termination, indemnification, and governing law.
- Special Conditions: Special conditions are additional contract provisions that are specific to the particular construction project. They supplement the general conditions and address unique requirements, risks, or circumstances that may not be covered adequately in the standard contract. Special conditions can include project-specific safety protocols, environmental considerations, or regulatory compliance requirements.
- Scope of Work: The scope of work document provides a detailed description of the work to be performed under the contract. It outlines the project objectives, deliverables, specifications, and any specific design or performance requirements. This document helps ensure a common understanding between the owner and the contractor regarding the project’s scope and expectations.
- Drawings and Specifications: Drawings and specifications are technical documents that provide detailed information about the construction project’s design and requirements. Drawings typically include architectural, structural, mechanical, and electrical plans, while specifications outline the materials, methods, and quality standards to be followed during construction.
- Addenda: Addenda are supplemental documents issued during the bidding process to provide clarifications, corrections, or additional information about the contract documents. They are used to ensure all bidders have the same understanding of the project requirements and to address any changes or updates that may arise before the bid submission deadline.
- Change Orders: Change orders are documents used to formally authorize modifications to the original contract. They outline the changes to the scope of work, schedule, and/or contract price and require the owner and contractor’s mutual agreement. Change orders help manage and document any alterations or adjustments that may occur during the construction process.
Types of Documents in a Construction Contract
The success of any construction project relies heavily on the comprehensive documentation that forms the backbone of the construction contract. These documents play a pivotal role in establishing clear communication, defining responsibilities, and ensuring that all parties involved are aligned with the project’s objectives and requirements. A construction contract encompasses a diverse range of documents, each serving a specific purpose and providing critical information to guide the project from inception to completion. Understanding the different types of documents within a construction contract is vital for construction professionals and stakeholders to navigate the complexities of the construction process effectively. In this article, we will explore the various types of documents commonly found in a construction contract, shedding light on their significance and the role they play in ensuring the successful execution of construction projects. By delving into these document types, we can gain a deeper understanding of their purpose and appreciate their importance in establishing a solid contractual foundation for construction endeavors.
The different types of documents in a construction contract are as follows-
Drawings and specifications
B.O.Q (bill of quantity)
Letter of acceptance
Conditions of Construction Contract
The conditions of contract are terms that rule the relationships between the owner and the contractor, define each party’s rights and obligations, specify the method of payment and determine actions required when existing any disputes between the owner and the contractor.
General conditions of contract
Special conditions of contract
1. General Conditions of Contract
They are standard terms that suit the majority of projects; they include:
Definition of the project
Rights and responsibilities for the owner and the contractor
Warranty and delay penalty
2. Special Conditions of Contract
They are the modifications required to suit the uniqueness of the project, make the contract flexible for the nature of the project, and achieve project objectives.
Selection of Type of Construction Contracts
One of the characteristics of construction projects is uniqueness. Every project has its particular circumstances, so it’s crucial to select the contract type which suits the project. The owner develops the process of selecting the type of contract.
Types of Construction Contracts
There are many types of contracts used in construction. Each type has its advantages and disadvantages concerning the owner and the contractor. They are categorized into two major groups as per the method of payment to the contractor. The following are the types of construction contracts generally used in construction projects:
Unit price contract
Target cost contract
Price-based Construction Contracts
1. Lump-Sum Construction Contract
In this type, the contractor bids a single fixed price for overall activities in the project scope. The contractor is responsible for estimating project costs from drawings then adds overhead and his profit to determine the value of the project.
All risks are assigned to the contractor, and there isn’t any risk carried by the owner. The contractor has an incentive in this contract as he is rewarded for an early finish, and there is a penalty for a late finish.
This contract is ideal when the project scope is well defined at the design stage because there is limited flexibility for modifying the design during the construction period.
2. Unit Price Construction Contract
The total price of the project in the unit price contract is based on the price of each item’s unit. The contractor is paid as per the rates of items specified in the bill of quantity.
The risk is shared with the contractor and the owner. This type of contract has more flexibility for design changes than the lump sum contract.
The construction of the project can be started before finishing the designs, so the total cost of the project will be uncertain at the early stages of the project.
Cost-based Construction Contracts
3. Cost Plus Construction Contract
The contractor is paid based on the actual cost of the project, including direct and indirect costs, plus a specific fee. This fee could be a fixed fee or percentage of costs.
All risks are assigned to the owner, and he gets involved with the contractor in the management of the project. The contractor has no risk in case of increasing the cost of the project; also, there isn’t any incentive for an early finish.
This type of contract is ideal when the project scope is uncertain in the early stages of the project. The contractor can start the execution of the project before finishing the design. It is impossible to estimate the cost of the project before the construction has been completed.
4. Target Cost Construction Contract
Target cost contract has common features of the lump sum and cost-plus contracts. The contractor is paid based on the actual costs plus a certain fee either fixed or percentage of total cost in case of the cost of the project doesn’t exceed certain target cost specified by the owner.
There is a risk carried by the contractor in case of an increase in the cost of construction projects. The contractor is also rewarded a percentage of any savings between target and actual cost.