What Should Be In A Construction Contract

Posted by: Nov 29, 2022By Brian Stutheit

Everyone, whether property owner or contractor, entering into a construction contract should think about the following matters. This is not an exhaustive list:

Who is the owner of the property? Has the owner signed the contract? If the signer is a tenant, or otherwise not the legal owner, how will the contract be enforced against the owner?
What is the estimated time for completion? Are there circumstances, such as unavailability of materials or labor shortages, under which the contractor’s delay will be excused? How does the owner get out from under the contract if the delay is inexcusable? Can you set time limits for accomplishing certain construction milestones?
Who gets necessary building permits? Who pays for the building permits?
What compensation is the contractor entitled to if payments are late, or not made at all? Interest? Attorney fees? When is a payment late?
Is there a sufficiently specific scope of work, so the owner knows what work they will receive and what materials will be provided? The contractor should consider language that it will not provide certain work. For example, “We will replace your siding, but not your soffit and fascia.” How will it be handled if either the owner or the contractor wants to change the scope of work after it has already begun? Be careful about allowing conduct after you have a written agreement which is different than you provided in your written contract, or making oral agreements after the written agreement. These may create to a binding new agreement.
How are payments to be made? If there is an up front charge, what specifically is it for? If payment is to be made in stages as the work is accomplished, how is it decided that a stage of the work is indeed accomplished?
May the contractor leave the job, or suspend work, if the owner fails to comply with contract terms?
In the event there is a dispute, how will it be settled? Is litigation allowed, or must the parties engage in binding arbitration? If there is arbitration, who pays the arbitrator? How is the arbitrator selected? Must the parties to the contract engage in non-binding mediation?
Does the prevailing party in a lawsuit or arbitration get its reasonable attorney fees, and costs of the lawsuit or arbitration?
Does the contractor get shutdown costs, or some other payment, if the owner terminates the agreement prematurely?
When will the job be “substantially complete” so that final payment is due?
Are there plans and specifications to be followed? Are they incorporated into your contract?
Who will be doing the actual labor? May the contractor use subcontractors? Must the owner approve subs? Does the owner’s approval of a subcontractor relieve the general contractor of ultimate responsibility? Must the contractor get lien waivers from its subcontractors?
Is it smart to sign a bid, instead of an actual contract? With any significant construction, probably never. How does the bid set the price? How will changes be approved, and at what cost? Is there a guaranteed maximum price? How will disputes be resolved? These are a few questions that are almost never answered in a simple bid.
If the work is being funded by insurance, may the contractor speak directly with the insurance adjuster? Does the contract say that the insurance money should go directly to the contractor? Are there special penalties if the owner gets the insurance money, and refuses to pay it to the contractor?
This law office is wary of “cost plus” contracts. This type of contract generally says that a contractor shall be paid for its actual costs of construction, and receive additional payments for profit and general overhead. Often, these contracts result in arguments between owners and contractors. Owners become suspicious that contractors are inflating costs to increase their profit. Contractors must engage in detailed accounting to prove to skeptical owners what the costs were, and that the costs were necessary and reasonable.