Contract documents

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May 4, 2022

Contract Sum

The contract sum is the amount that the owner will pay to the contractor. The contract sum includes all items and services necessary for the proper execution and completion of the contractor’s work, and it is subject to additions and deductions as provided in the contract documents.

The contract sum may include allowances, which are amounts for items that are not specifically determined at the time of entering the contract, but that are included in the contract sum. For example, a contract for a kitchen remodel may include an allowance of $5.00 per square foot for the backsplash material. This means that the total contract sum includes $5.00 times the number of square feet needed. If you chose a material that does not cost as much, the difference would be deducted from the total cost at the end of the project. Conversely, if you chose a material that costs more than the allowed amount, you would be billed for the difference.

The contract will typically allow for changes to be agreed upon between the owner and the contractor that arise during the course of the work and that impact the contract sum. This is usually the result of an unforeseen circumstance, such as if a specified material becomes unavailable. The contractor may suggest a substitution that requires a cost adjustment and ask for the owner’s approval of that change. Ay such changes to the contract sum should be agreed upon in writing to avoid misunderstandings going forward.

For a single family residential or small commercial project, the contract sum is usually a fixed price, sometimes also called a stipulated sum. The price for the project would be a total amount, such as $50,000.00. As noted above, the contract sum might include allowances. The cost for certain portions of the work might also be listed in the contractor’s proposal, including costs of subcontractors, such as plumbers or electricians.

There are other methods that are used to determine the contract sum in construction projects, such as cost of the work with a fee, but those are generally for more complex projects. If you are entering into an agreement that is not for a fixed price, the contract should clearly state how the contract sum is determined.

Owner Financing

Owner financing for construction of a single family home or a small commercial project is often obtained through a construction loan. A construction loan, as opposed to a mortgage, is a short-term loan used only to finance the project. It is beyond the scope of this article to provide a comprehensive discussion of construction loans. You should consult with lenders for further details if interested in a construction loan.  For smaller projects, like a remodel, the owner might use cash, a home equity loan, or a home equity line of credit.

Sometimes the contractor may want assurances that the owner has sufficient funding to pay for the project. The owner/contractor agreement may include a provision that addresses this issue. For example, AIA Document A104-2017, Abbreviated Form of Agreement Between Owner and Contractor, contains a provision that permits the contractor, prior to commencement of the work, to ask the owner to furnish reasonable evidence that the owner has made financial arrangements to fulfill the owner’s obligations under the contract. The contractor does not have to start the work until the owner provides such evidence.

Payment Process

There are different ways that payments might be made during the course of the project. The contractor might submit payment applications at monthly intervals, detailing the work that was performed during that month. The amount of each monthly application is part of the contract sum. If an architect is providing contract administration services, the architect will review the payment application and recommend to the owner whether to pay the application in whole or in part. If there isn’t an architect involved in the payment process, the owner or the construction lender would review the contractor’s payment application.

Another method of payment that might be used is payments due at completion of construction milestones. For example, in a renovation project, milestone dates might be completion of demolition, framing, hanging of drywall, etc. A payment might be due at each of those points.

Payments might be conditioned, by the owner or by the construction lender, on the contractor providing certain documentation such as waivers of liens or manufacturers’ warranty documents. Any such requirements for payment should be specified in the owner/contractor agreement. The agreement should also specify how many days the owner has, after receipt of an invoice or payment application, to make the payment. This is important because, if the owner does not make timely payments, the contractor might have the right to stop the work or terminate the contract.

Conclusion

You want to be sure that you understand the contract sum and the payment process, and that you have adequate financing for your project. These items are crucial to your ability to have a complete and successful project.

Our next article will address the issues of rejection and correction of work.

Susan Van Bell, Esq. was Senior Director of Content for AIA Contract Documents for over ten years. She is currently a consultant.

AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.