A construction contract can range from a handshake to an official document the length and complexity of the great novel War and Peace. That said, there is a happy medium for a good construction contract. It stops short of excess, but thoroughly covers all 13 of the “must-have” sections of your agreement with a construction contractor.
Without a solid agreement like this, chances are your interests will not be protected if and when something goes wrong. And,
given the investment and duration of the average construction contract, it makes no sense to proceed—when you can simply insist that these 13 sections be included.
Elements of a Good Agreement
All good written agreements, including construction contracts, include the same elements:
- They are clear in intent and language–it’s easy to understand what they need to say, and how they say it.
- They anticipate the needs of all parties, and provide for how all issues and disputes between the parties will be handled.
- They specify the subject of the contract, and completely cover the entire relationship and interactions of the parties.
With this understanding, good construction contracts include the following 13 sections:
- Complete Set of Construction Documents
- Complete Description of the “Work” to be Completed
- Project Clarity: Costs, Rates, and Payment Terms
- Cost Estimate and Cost Guarantee
- Responsibilities of All Parties
- Details of Change Order Processes (with forms)
- Excusable vs. Non-Excusable Delays
- Contractor Warranty
- CSLB Information and Mechanics Lien Warning
- Dispute Resolution: Arbitration vs. Court Action
- Various “Miscellaneous” Provisions
- Consulting an Attorney
1. Complete Set of Construction Documents
Every construction contract should include a complete set of documents the parties will need throughout the construction process. These should be included as exhibits or schedules to the main contract, and should be referenced as part of the contract itself. Necessary construction documents in the contract should include the following subsections:
- Construction “Plans and Drawings” (Structural, Civil, and Architectural)
- The “Work” and Construction Specifications, all clearly defined and identified
- Detailed Cost Estimate of the Project
- Change Order Forms
- Contractor’s Labor Rates, Contractor Fees, and Payment Terms
- Contractor’s Certificate of Insurance
2. Complete Description of the “Work” to be Completed
The “work” to be completed by the contractor should be clearly defined, including all required specifications. The work should include references to the Plans and Drawings, and the Cost Estimate. Construction should fulfill all specifications included in these contract documents. The contract should state all of this precisely.
3. Project Clarity: Costs, Rates, and Payment Terms
One must take great lengths to ensure that contractor costs, rates, and payment terms are stated as clearly as possible in the contract. If there is any uncertainty on the contractor rates or payment terms in the contract, there will be a high probability of confusion and dispute over the construction payment issue. Be sure it is clear how much you will pay, and how and when payments will be made.
4. Cost Estimate and Cost Guarantee
Prior to the execution of the contract, the contractor should provide a detailed cost estimate, which should be used to provide a cost guarantee.
The cost estimate should make clear:
- If the subcontractors’ price estimates will be “marked-up” by the contractor, and if so, by how much.
- How the general conditions or other overhead charges will be passed on to the owner.
- What profit the contractor will make, and how is it that profit is calculated.
The cost estimate can be used to determine the cost guarantee. The cost guarantee will exclude owner-requested changes, material increases, and changes outside of the control of the contractor (i.e. government inspector-required changes). It is also likely that the contract will include a 10% cost increase maximum.
5. Responsibilities of All Parties
Get clear on what your responsibilities are to the contractor, and what his or her responsibilities are to you. What times do you need to make the property available to the contractor? What does the contractor need to do to complete the project (punch list delivery and completion, cleanup, landscaping, etc.)? How and where are payments to the contractor to be made?
6. Details of Change Order Process (with forms)
Change orders are a likely part of any construction process. Plans change sometimes, as do the desires of owners. The change order process and forms need to be clear in the contract. Be sure the change order forms include details on what is being changed, why it is being changed, the time the change will take to complete, and the cost of the change to the owner.
7. Excusable vs. Non-Excusable Delays
Some construction delays are unavoidable. Bad weather, industry strikes and material unavailability are among the possible reasons. The unavoidable delays must be distinguished from contractor-caused delays. Contractor-caused delays such as failure to provide sufficient labor, failure to properly manage a construction project, and generally slow work should be actionable by the owner. In other words, there should be consequences to the contractor for failure to meet the pre-planned construction schedule if the contractor is responsible for those delays.
8. Contractor Warranty
The Contractor should warranty his work–at least to the extent it is the “work” required by the Plans and Drawings subsection, and other contract documents. The contractor should warranty that he or she will perform the work “in a good and workmanlike manner,” and that the construction will be “free from defects not inherent in the quality expected to complete the ‘work’.”
Insurance provisions and limits are important. The contractor should provide a Certificate of Insurance (COI) as part of the contract documents. The COI should provide individual claim insurance limits that clearly cover the cost of your project, whatever size your project is. The contract should also require the contractor to maintain workers’ compensation insurance for all contractor employees.
10. CSLB Information and Mechanics Lien Warning
The contract should include information on how you can contact the California Contractors State License Board (CSLB). The CSLB governs how contractors are licensed and work in California. You may want to contact the CSLB if you have problems with your contractor–the CSLB provides recrimination against contractors who do not obey the law.
Also, contractors may record, if not paid, a mechanics lien on your property. The contract should include a clear understanding of the rights of the owner, the contractor, and subcontractors to place and remove liens on your property
11. Dispute Resolution: Arbitration vs. Court Action
The contract should cover how disputes between owners and contractors get handled. Generally, the two choices are arbitration or a court of law. The court system likely provides for a more complete discovery process than does arbitration. Arbitration is usually faster and cheaper, with decisions made either by an individual arbitrator or an arbitration panel.
The contract should be clear not only on the type of dispute resolution process, but also the process itself. How many days after a written notice of dispute can dispute resolution be sought? Is mediation a prerequisite to the dispute resolution process? What written notices are required? Are attorneys’ fees recoverable by the dispute winner? What is the arbitration forum (AAA, JAMS, etc.)? What law will be used (CA State law, AAA Arbitration rules?) All of this should be discussed with your lawyer before signing a construction contract.
12. Various “Miscellaneous” Provisions
Most contracts have a plethora of “miscellaneous provisions,” such as Entire Agreement, Counterparts Validity, Right to Cancel, Indemnification and many more. These provisions do not seem critical but, when a dispute occurs, they can become very important. Your lawyer can review the meaning of all these “miscellaneous provisions” with you.
13. Consulting an Attorney
The final element is not a section of your agreement, but it is no less important, so we will address it. No one likes paying lawyers. However, for a contract as important and complicated as a construction contract, and with the dollar amount of the project usually being significant, there is no substitute for hiring a lawyer to assist you in navigating a construction contract.
A construction contract review should cost no more than $5,000 unless there are unexpected extensive negotiations. Lawyer fees are certainly not insignificant. But, considering the complexity and importance of a construction contract, it is an absolute MUST to have a lawyer review and consult with you about your construction contract.
Generally speaking, just as “good fences make good neighbors”, one could say “good construction contracts make for good construction projects, and good relations between owner and contractor”. Reading page after page of a construction contract is neither easy nor fun, but it is a necessary part of construction.
You owe it to both yourself and your project to take the time and effort to carefully review your construction contract. And, equally important, if not more important, is to hire an experienced construction lawyer, and to ask your contractor and lawyer about anything you don’t fully understand in your construction contract.
This White Paper is a high-level review of some of the things you should be aware of and looking for in a construction contract. There are additional provisions, agreements and requirements of a construction contract not listed in this White Paper that are needed in a construction contract to fully protect you.
There is no substitute for a lawyer review of a construction contract on your behalf. It is not only highly recommended, but consider it a requirement – to hire an experienced construction lawyer to represent you and protect you in a construction contract. Nothing is this White Paper is intended to be legal advice to you. Only your lawyer can give you competent legal advice.
For more information, call us, and we’ll be happy to help:
Mike Samuelson and George Tingo
Samuelson Tingo Construction Services LLC
Santa Rosa, CA