Contract Basics for Contractors: Importance of the Contract

Susan Van Bell, Esq., AIA Contract Documents Consultant

January 18, 2024

Hello! Welcome to this series of articles on contract basics for contractors. This article will discuss the importance of the contract for your projects. Subsequent articles will discuss other important topics, including contractual relationships in different delivery methods, essential terms and conditions, payment methods, and risk management.

Let’s begin by discussing the legal requirements for a contract. A legal definition of a contract is as follows:

“A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty.” Restatement (Second) of Contracts §1.

Breaking this down further, the essential elements of a contract are offer, acceptance, and consideration. One party offers, or “promises,” to do something, the other party accepts, and they agree on a consideration, which is often but not always money, as compensation for the performance. If either of the parties does not perform as agreed upon, that may be a breach of the contract for which there is a remedy.

Sounds pretty simple, doesn’t it? Unfortunately, construction projects are complex, and a construction contract is not as simple as “ABC Construction will build a house for Mr. Smith for the sum of $200,000.” Although that example does include the elements of offer, acceptance (if signed by both parties), and consideration, it is way too general to fully cover the scope of the work to be performed and many other items that should be included for a clear understanding of the project and to provide essential protections for both parties.

Of course, as contractors, you are more interested in the building process than in the contract, and there may be a tendency to want to keep the contract as simple as possible. But it is important to recognize that the contract is an important risk management tool that can help avoid disputes both during and after completion of construction. The contract is also an important tool that you can use to educate your client, who may have very little knowledge about what to expect during the construction process. In addition, the contract should reflect current law and industry practice.

What should your contract include to cover all of the bases? At a minimum, the contract should define the relevant parties and the contract documents, statutory and other requirements, scope of the work, responsibilities of the parties, contract time, contract sum, payment amounts and payment process, insurance, dispute resolution, and termination. Contract provisions that clearly address all of these items will provide clarity for the roles of each party and help to avoid disputes. If either party fails to perform as specified in the contract, that could be a breach of the contract and grounds for a legal remedy. So, it is important to be as clear and comprehensive as possible. That way, if an issue arises during the project, you can look to the contract to help resolve it before it becomes a dispute that is subject to litigation or poisons the relationship between the parties.

Often, a clear contract provision will result in a relatively easy resolution of a problem. One or the other of the parties may simply have forgotten what was required by the contract or made an honest mistake. If you can point to a contract provision that addresses the issue at hand, it may provide the resolution that is needed.  However, if you have an issue that is not addressed in your contract, it can become a subject of a contentious dispute. It is much easier to head that off by including as much as you can in the contract.

You may feel that presenting a contract that includes all of these items to a client will put the client off. It’s true that a client might be concerned if a contract seems to be too complicated. This is where you can view the contract as an opportunity to educate the client. Sit down and review the contract thoroughly and answer any questions the client may have, such as “what is an allowance?” Remember that there is a lot of terminology in construction that you use every day but that a client may have never heard. The more you can educate your client about the construction process and set expectations, the less likely that there will be misunderstandings and disagreements. As you know, there is a close working relationship between the owner and the contractor.  The better that relationship is, the more enjoyable it will be to work on the project and the better the outcome. So, use the contract as a way to set clear ground rules and understandings to facilitate that relationship!

You may be someone who likes to prepare your own contracts. In fact, you may have a form contract that you use for many projects where you just change the basics. While that may work to a certain extent, a better practice is to tailor each contract to the size and scope of the project. A small residential project doesn’t need a contract that addresses as may issues as a contract for a large commercial project. It is also advisable to have a local attorney who is knowledgeable about construction to review your agreements. There may be local statutory requirements that need to be addressed. This is particularly true in the area of residential construction, which is viewed in more of a consumer protection framework. Some jurisdictions have requirements in place for the protection of the homeowner. The law is a changing thing and you need to make sure your contract is current with applicable statutory or case law.

Try to view the contract for a project as another tool in your tool kit that will make the project better, rather than as a piece of drudgery that has to be completed before the real fun starts.

Our next article will address different types of delivery methods, such as design-bid-build and design build, how the contractual relationships are different depending on the delivery method, and the implications of those differences.

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 software allows you to efficiently create, share, and manage the industry’s leading construction documents. Request an ACD5 Product Demo Here.

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.