Contract documents

February 27, 2024

Everyone likes a short simple contract. If you are using a short form of agreement, it undoubtedly includes your scope of work and how much you will be paid. But it is essential to consider, based on the size and scope of the project, what other terms should be included. These items help to direct the course of the project, as well as anticipating potential issues that could arise and providing a process for how such issues will be handled. Depending on the type and scope of project, the terms may be included within the owner/contractor agreement or may be set forth in a separate general conditions document that also forms a portion of the contract.

At a minimum the contract should name the relevant parties, and address scope of work, changes in the work, contract time, contract sum and payment process, and dispute resolution.

A well-defined scope of work is important so that there are no misunderstandings between the owner and contractor about what will be provided by the contractor. This should include both work and materials to be supplied. Nonetheless, it is a reality that change to the work are required in many construction projects, whether due to unforeseen circumstances, revisions requested by the owner, or a host of other reasons. The contract should anticipate that eventuality and include a process for changes, including modifications that may be needed to time to perform the work and additional compensation required due to such changes.

Contract time should be included based on relevant milestones for the project. These may be as simple as start of construction and anticipated completion date, or may include interim milestones for a more complex project.

Contract sum and the payment process are obvious items to include. There are different methods of compensation and processes for payment that will be discussed in more detail in the next articles in this series.

Construction is an area where relationships are very important. Many projects are near and dear to an owner’s heart, and they want to feel like their project is in the right hands. You want to have a good working relationship with the owner. Unfortunately, disputes may arise. With a comprehensive contract, many disputes can be resolved without a formal dispute resolution process, but occasionally the parties must move forward to dispute resolution to have claims resolved. Your owner/contractor agreement should address the type of dispute resolution procedures that will be used if an issue cannot otherwise be resolved. Many AIA Contract Documents provide that the parties must use mediation as a first attempt at a resolution. If mediation is not successful, the parties may select a form of binding dispute resolution, including arbitration, litigation in a court of law, or some other method preferred by the parties. More streamlined agreements that are geared toward residential or small commercial construction may not contain quite such a detailed process. Again, scope of the project is relevant.

Other items that should be considered to include in your contract are specific responsibilities of the owner, including information to be provided and any consultants to be retained by the owner, such as a geotechnical engineer and a geotechnical report. Will there be an architect on the project? If so, the contractor should know about any construction contract administration to be provided by the architect. The contract should also specify consultants or subcontractors to be provided by the contractor. Important definitions should also be included, such as what makes up the Contract Documents.

Statutory requirements, warranties, and liens may also be addressed. These are somewhat related topics as warranties and liens are often defined by statute. But, even if not, the owner should know what warranty you are providing for the work, which is another important way to avoid future disputes. In addition, the contract might address standards and processes for rejection and correction of work which may be separate from the warranty.

Insurance is an important risk management tool in construction, both owner-provided and contractor-provided insurance. A separate article in this series will discuss the fundamentals of insurance. It is critical for you to make sure that you have the types and limits of coverages for the projects that you are taking on. It is highly recommended that you have an insurance advisor to assist you.

Another topic to consider including is termination. Nobody likes to talk about termination, and we all hope it won’t happen on a project but addressing it in an agreement helps to protect both parties and ensure that they receive whatever they are due in a termination situation. You may wish to specify the reasons that would permit you to terminate the contract for cause, such as the owner’s failure to pay, and what you would be entitled to recover in that event. Owners are typically entitled to terminate a contract for a material breach by the contractor, for example: failing to provide properly skilled workers or proper materials or failing to make payments to subcontractors. Some contracts also include a provision allowing the owner to terminate for convenience with payment of a negotiated termination fee.

These are basic items to include in a construction contract. Depending on the specific project, there could be many others to consider. We strongly encourage you to work with a construction attorney, as well as your insurance advisor, when preparing your contract or to assist you if reviewing an owner-provided contract.

Our next article will address different types of payment methods, including stipulated sum or fixed fee, cost of the work, and guaranteed maximum price.

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

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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.