Create a customized construction contract to define the rights and responsibilities of both parties. Outline the scope, date, and payment terms of a construction project.
Last Update May 1st, 2023
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- What Is a Construction Contract
- Types of Construction Contracts
- When is a Construction Contract Needed
- Verify Contractor License
- How to Write a Construction Contract
- Construction Contract Sample
- Other Types of Contracts
- FAQs About Construction Contracts
Construction Contract Template
What Is a Construction Contract
A construction contract is a legal document that sets the terms of a construction project and defines the work that will be done. It must be agreed to by all the parties involved, including the contractor, which will be carrying out the work, and the person or company who hired them to do the job (usually known as an owner, employer or client).
A construction contract can also be referred to as a:
Simple construction contract
Standard construction contract
Construction agreement
Construction contractor agreement
Construction agreement
Construction management agreement
Service agreement for construction
Construction services contract
Contract for construction
Construction contractor agreement
Contractor agreement
What should a construction contract include
A construction contract requires various details in order to be legally binding and to ensure it holds up in court. Having all the necessary information also helps avoid future misunderstandings and conflicts.
Below are the main terms a construction contract should usually include:
Full name, address, and contact details of the contractor and owner
A legal description and address of the worksite
The dispute resolution process
Contract price and payment terms
Contract documents
Work schedule and starting and completion dates
Subcontracts
Inspection guidelines
Decision-making responsibilities
Labor/material cost and financing requirements
Work change rules and project termination rights
Payment withholding rights
Breach of contract remedies and force majeure
License, permit, warranty, and insurance requirements
Damage amounts and liability limits
Signature and date by both parties
Types of Construction Contracts
There are various different types of construction contracts. Depending on the type of construction project needed by the owner, they can be customized to meet specific requirements and conditions.
The most common types of construction contracts include the following:
| Contract Type | Benefits | Disadvantages |
|---|---|---|
|
Lump Sum
Customer pays for the project with a lump sum (e.g., $50,000 to build a guest house). |
Contractor can ask for a higher price to protect against unforeseen circumstances. Total costs may be overestimated, which can lead to higher profits for the contractor. |
Total costs may be underestimated, which can lead to lower profits for the contractor. All risk is carried by the contractor. May lead to higher bidding by the contractor due to the possibility of losses, which can make them lose the contract. |
| Time & Materials
Customer pays for the actual time and material costs/
|
Easy to pivot if the specifications change for the project. Simple negotiation process. Able to handle variability in time or materials used. |
Costs can rise significantly.
Can be complicated to track time and materials. Higher chances of contractor dishonesty and fraud. Owners may need to verify a large amount of additional claimed costs. No benefits to efficiency unless scheduling bonuses are included. |
| Costs Plus
Customer pays for the time and material costs, plus an additional job fee. |
All costs, including overhead and other conditions, are properly accounted for. Able to handle variability in time or materials used. |
Costs can rise significantly. Can be complicated to track time and materials. Higher chances of contractor dishonesty and fraud. Owners may need to verify a large amount of additional claimed costs. No benefits to efficiency unless scheduling bonuses are included. |
| Unit Price
Customer pays for the project in smaller units rather than one overall price. |
All costs, including overhead and other conditions, are properly estimated. Able to handle variability in time or materials used. |
Final cost is determined only after the project is completed. May lead to an unbalanced bid due to the contractor’s ability to raise and lower the prices of certain items. |
| Guaranteed Maximum Price
Customer pays for a guaranteed maximum price, and the contract covers any additional costs. |
Security for the owner that they won’t bear extra costs due to contractor mistakes Smooth flow of work as details are worked out in advance. Contractor is incentivized to complete the work ahead of schedule. |
Total costs may be underestimated, which can lead to lower profits for the contractor. May lead to higher bidding by the contractor due to the possibility of losses which can make them lose the contract. |
When is a Construction Contract Needed
Deeding on the state in which you reside, a written contract will be legally required for some or all construction projects you undertake. Whether or not you need a contract will often differ based on the size of the construction project.
For example, in California, a written construction contract is necessary for all home improvement projects over $500. In this case, the contract, alongside any changes made, must be in legible writing including all the necessary terms and conditions.
Consequences of not signing a construction agreement
Starting a construction project without a signed contract can put both parties in a risky position. Without a contract, it can be difficult to ensure either party follows through with their responsibilities and obligations as specified.
This can lead to misunderstandings and legal issues occurring on a more frequent basis. In addition, if a dispute were to arise, the lack of a contract existing will often result in the conflict ending up in litigation, making the resolution much more costly.
Verify Contractor License
Before hiring a contractor or a construction business, it’s important to verify that they are properly licensed within the state, before signing the contract.
Licensed contractors help to minimize financial risk if the work is incomplete or faulty, a worker is injured on the property, or the property itself is damaged. Work performed by an unlicensed contractor may not be covered under your insurance policy, and they are unlikely to qualify for worker’s compensation and liability insurance.
Below are some examples of state licensing requirements:
California: General contractors are required to have a California contractor license for projects worth more than $500. They’ll need to have proof of at least 4 years of professional experience completed within the last 10 years; passed business, trade, and law exams; provide proof of surety bond and general liability insurance.
Texas: General contractors are not required to obtain a license, but there may be licensing requirements at the local level. If the contractor will be doing plumbing, electrical, or HVAC work, they will need a state license.
Florida: To get a Florida construction license, general contractors need at least 1 year of experience in construction work on buildings less than 4 stories high. Building contractors are limited to the construction, modification, repair, or improvement of residential or commercial buildings that do not exceed a height of 3 stories. Residential contractors can only work on residencies that do not exceed 2 stories in height. In addition, every contractor must pass trade, business, and law exams; provide proof of relevant work experience and/or education; and provide a financial statement as well as proof of general liability and worker’s compensation insurance.
New York: General contractors are not required to obtain a license, but there may be licensing requirements at the local level.
Pennsylvania: General contractors do not need to be licensed, but if the value of the annual home improvement projects exceeds $5,000 they will need to register with the state’s Attorney General's Office. Requirements may also vary from city to city.
How to Write a Construction Contract
There are various key details that a construction contract must include to prevent miscommunication between the client and the contractor. While a lawyer is not needed to write up one of these agreements, missing out on important information can render the contract invalid.
We recommend using one of our construction contract templates to make sure your document includes all the necessary points. By using our builder, you’ll be able to complete your document in minutes with the help of expert legal guidance and advice.
Construction Contract Sample
We recommend looking at a 100% verified sample contractor contract before starting your own.
Use our example below to get a feel for the points to cover and details to include in your own customized agreement.
Other Types of Contracts
You might be interested in other services as well. If so, use a service contract to formalize the service.
A service contract is designed to protect both the person providing and receiving the service.
It adds security if the contact is terminated or terms aren’t respected.
Other types of service contracts that LawDistrict makes easy to create:
FAQs About Construction Contracts
A construction contract needs to be prepared carefully, to ensure no crucial provisions are missing when it’s signed. To find out more about how these agreements work and must be prepared, check our FAQs below.
How does a construction contract work?
A construction contract is a legally binding agreement which records the terms and conditions of a specific construction project in document form. By putting the scope of the construction work in writing, this serves as a record of commitment for both parties, thus helping to prevent future conflict, and mitigate risk.
How to terminate a construction contract?
An owner can terminate a construction contract if the contractor defaults and fails to cure the default. This may include a failure to perform the required work, meet the project schedule, or comply with applicable laws. Owners may also terminate a construction contract upon prior written notice, for their convenience and without cause. In this case, the two parties usually negotiate the termination.
On the other hand, a contractor may terminate a construction contract if the owner defaults and fails to cure such default. A default may include nonpayment in bad faith or without evidence being provided by the owner.
In most states, a notice of termination should be served by either of the contracting parties if they wish to terminate the contract, or they are unable to hold up their end of the agreement. It’s important to check the guidelines in your area, as notice requirements can differ from state to state. Termination rights may also differ depending on the contract that was established.
How do you recognize revenue in a construction contract?
Construction revenue recognition is based on the activities and performance of the contractor. Under the current standard, revenue is recognized when the contractor satisfies performance obligations. It is calculated by reference to the stage of completion where the construction contract’s outcome can be estimated reliably, or to the extent of recoverable contract costs incurred.