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November 23, 2022
When it comes to construction projects, having a written contract is essential. It ensures that both parties clearly understand their responsibilities, minimizing misunderstandings throughout the project’s lifespan. Construction contracts, however, are not “one-size-fits-all” agreements. Each project has its own unique needs, which means the contract should be customized accordingly to protect all parties involved.
In today’s construction industry, contracts can vary significantly, and it’s crucial that they are thoroughly defined to avoid conflicts or incomplete terms. Below, we outline five essential terms that should be included in every construction contract to ensure smooth project execution and completion:
1. A Well-Defined Scope of Work: Set Clear Expectations
The scope of work in a construction contract describes the specific tasks, deliverables, and responsibilities that the contractor is expected to fulfill. This includes all labor, materials, equipment, and services necessary for project completion. A well-defined scope serves as the foundation for both the contractor’s obligations and the owner’s expectations, ensuring everyone is on the same page.
Without a clearly outlined scope, there’s a higher risk of project delays, cost overruns, and misunderstandings between the contractor and the owner.
Why It’s Crucial:
- Defines expectations
- Reduces ambiguity
- Prevents disputes over incomplete work
2. Contract Time: Ensure Timely Project Completion
Including a contract time provision is essential for any construction project. This defines the project’s timeline, including key deadlines and milestones (such as substantial completion). Having a clear timeline allows all parties to track the project’s progress and helps ensure that the work is completed on schedule.
Key Considerations:
- Specific completion dates
- Regular progress updates
- Milestone deadlines
3. Contract Sum and Payment Terms: Clarify Financial Expectations
The contract sum refers to the total amount the owner will pay the contractor for completing the project. This section should specify the amount to be paid, how payments will be made, and the payment schedule. Additionally, it’s important to define the payment method, which could fall under one of four categories:
- Stipulated sum (also known as lump sum or fixed price)
- Cost-plus (where the owner reimburses costs plus a fee)
- Time and material (based on the time spent and materials used)
- Unit pricing (based on a set rate for each unit of work)
Clear payment terms help prevent misunderstandings and ensure that the contractor is paid promptly for work completed.
Tip for Avoiding Disputes:
- Be sure to specify how non-fixed price contracts will be calculated to prevent disputes.
4. Modifications: Handling Changes in Construction Contracts
Construction projects often require modifications to the original agreement due to unforeseen circumstances. It’s important that the contract outlines how these changes will be handled. Specify a clear process for making modifications, including how requests for changes should be submitted and approved.
Best practices:
- Establish a step-by-step process for changes
- Require proper documentation for any changes
- Ensure both parties agree to modifications before work continues
Why This Matters:
- Modifications keep projects on track while adapting to changes in scope or unforeseen issues.
If you’re interested in learning more about changes to construction contracts, you can read more about it here: Changes to the Contract: Differences Between Change Orders and Construction Change Directives
5. Claims and Dispute Resolution: Avoiding Legal Pitfalls
Disputes are an unfortunate reality in many construction projects. Therefore, your contract should include clear procedures for submitting claims and resolving disputes. This ensures that any issues are documented and addressed promptly.
Dispute resolution options might include mediation, arbitration, or even litigation if necessary. Be sure to include details such as notice requirements and specific timeframes for submitting claims to ensure that no party is prejudiced by delayed action.
Common Disputes Include:
- Delayed payments
- Quality of work
- Scope creep or changes not agreed upon
- Failure to meet project timelines
Protect Your Project with a Detailed Construction Contract
These five essential terms—scope of work, contract time, payment terms, modifications, and dispute resolution—help ensure that all parties are on the same page and that the project proceeds smoothly. Detailed contracts reduce risks, protect both parties, and make it easier to manage large, complex construction projects.
If you’re working on a construction project, take the time to customize your contract using the AIA Contract Documents, which are designed to allocate responsibilities and risks for different project types and sizes. Customizing your contract ensures it covers all bases, keeping the project on track and avoiding costly disputes.
Including these key contract provisions in your construction agreements will help safeguard the interests of both parties and ensure a smoother project flow. Make sure your contract is customized to your specific project needs for optimal protection. Have questions or need help drafting your contract? Contact us today to ensure your construction project is protected from start to finish.
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.