5 Key Terms That Should Be in Every Construction Contract

By AIA Contract Documents

November 23, 2022

Construction professionals need written contracts to ensure that the agreement is mutually understood by the parties at the outset of the project. Additionally, written contracts help to avoid misunderstandings as the project proceeds through completion. However, construction contracts are not one-size-fits-all. Though contracts for different projects may contain similar provisions, each project calls for its own unique terms, so that each party is protected throughout the work and beyond. Additionally, contracts in today’s construction market vary, and since many are highly customized, they can have missing or conflicting terms that are vital for properly completing the work.

Here are our top five key contract terms and provisions that you should consider including in your construction contract before signing the agreement:

  1. A Well-Defined Scope of Work.

The scope of the contract is a description of the work that will be performed by one party. This portion of the agreement is a framework of the construction and services required by the entire contract, which may include general conditions, drawings, specifications, addenda, and modifications. For example, the work of the contract may include all “labor, materials, equipment, and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations.” A well-defined scope of work is necessary for a successful project because it lays the foundation for expectations for the owner and requirements of the contractor in completing the work

  1. Contract Time.

A timeframe for the work that is to be performed is a key term that should be included in every construction contract. The contract time may also include deadlines for milestones, such as substantial completion. The contract time allows the parties to agree as to when the project will be completed and the degree to which the project progresses. When determining the contract time, the parties may also consider including a requirement that the contractor regularly provide updates to the owner regarding the progress of the work. This requirement may help to ensure that the project is on track to finish at the time specified in the contract.

  1. Contract Sum and Payment Terms.

The contract should cover all payment terms for the work, including the contract sum. Generally, the contract sum is the amount that the owner will pay to the contractor and includes all items and services necessary for the completion of the contractor’s work. At a minimum, the contract should cover the amount to be paid for the work, how payments will be made, and the frequency in which payments will occur. Generally, construction contract payment terms fall into four categories: 1. Stipulated sum (also referred to as lump sum or fixed price); 2. Cost-plus; 3. Time and material; and 4. Unit pricing. If your contract is not for a fixed price, it is important to clearly define how the contract sum is determined.

  1. Modifications.

Projects of all shapes and sizes may need modifications to the original contract terms. This is usually due to unforeseen circumstances. The construction contract should specify when and how changes are to be made to the agreement. It is good practice to include a step-by-step process for dealing with changes to the work, and to ensure that the parties mutually agree about what that process entails. For example, if either party decides they need to deviate from the original terms, the contract may specify that this is permissible when certain information or documentation is submitted as part of a request for a change. 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

  1. Claims and Dispute Resolution.

The contract should define the procedures for the submission of claims and dispute resolution. It is important to define when and how claims should be documented and submitted during the project. The parties may also consider specifying any notice requirements when claims arise and are submitted. When claims are not resolved, the contract should cover the parties’ dispute resolution process, such as litigation, mediation, or arbitration. These provisions are key in construction contracts because a party may incidentally be prejudiced if they fail to bring a claim in a specific manner or begin the dispute resolution process by a date certain.

These key contract provisions protect against major elements of risk that may be inherent in projects. As projects become larger and more complicated, a potential for additional risk and greater exposure exists for all parties. Agreements should be sufficiently detailed to adequately address those types of issues. AIA Contract Documents have been developed to allocate risks and responsibilities at a level of detail specific to different sizes or types of projects. AIA Contract Documents may be customized so the parties to include items that are not specifically addressed in the agreement.

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.