: 10 Things to Think About Before Signing a Construction Contract - Introduction
10 Things to Think About Before Signing a Construction Contract: Introduction
A well-drafted construction contract clearly sets out the work to be done, the price to be paid for the work, and the terms and conditions of payment. The contract should also allocate various foreseeable risks between the parties. When the parties allocate a list of potential risks, the contract becomes longer, but it reduces the potential for disagreements in "gray areas" that are not addressed at all - assuming that both parties take the time to read and understand the lengthy, dryly-worded document. Of course, failure to read a written agreement is not a valid defense.
Because the subject of contracts is covered in depth elsewhere, the fundamentals of contract law are not addressed here, but contractors should be aware that all of the requirements of basic contract law must be met for a construction agreement to be valid. We will focus here on construction-specific applications of contract law.
Construction contracts are often formed through the bidding process. The owner requests a quote or issues a more formal request for proposals, and contractors wishing to perform the described work respond with the price that they would charge. The contractor's bid constitutes a binding offer, which if accepted, results in a legally enforceable contract. The acceptance of a bid is generally referred to as an "award" of the contract.
In the case of private construction contracts (as opposed to government contracts), the property owner requesting bids is generally free to accept or reject any bid, regardless whether the bid is the lowest or most responsive one. In the case of public contracts, however, the bidding process must follow strict rules set forth in federal, state, and local laws and regulations.
Construction contracts consist of terms of agreement ranging from price and description of materials to be used to an agreement that any disputes will be resolved through arbitration. Courts are reluctant to imply terms that are not expressly part of the contract, but courts may look to local custom if the contract is silent on a hotly disputed key issue.
Example: Under local custom, the contractor had to obtain a certificate of occupancy before final payment. But the written agreement in question had no clause requiring the contractor to furnish the certificate of occupancy. The court found that the local custom was part of the agreement by implication.
Parties to a construction contract generally select from one of several traditional methods by which the contract is priced. The following are among the most common:
- Lump sum. The owner agrees to pay a specific dollar amount for whatever is required to complete the job, such as an agreed fixed fee of $3,306 to install a new hardwood floor. If the contractor makes a mistake in the estimate for labor or materials, the contractor bears the loss.
- Unit price. The contract is priced by the number of units delivered multiplied by a set rate per unit, such as an agreed rate of $6.39/square foot for installing a hardwood floor. Contractors bear less risk under unit price contracts because an error in estimating the size of the job does not stick the contractor with overages.
- Cost plus a fee. Under this arrangement, the contractor agrees to keep records of the costs for labor and materials. The owner agrees to pay for all the submitted costs plus a markup, which can be expressed either as a percentage or as a lump sum, such as an agreement that a contractor will install a hardwood floor and charge the actual cost of the materials plus 35%.
If there is a dispute regarding the price, courts will first attempt to determine which type of pricing scheme the parties agreed to use, determine which party assumed risk of error or contingencies, and finally determine which party bears financial responsibility.
At some point you will probably find yourself wondering whether you should really sign the contract in front of you. If you order items from a-door-to door salesman, hire a contractor for a home improvement project, or go to work for someone as a consultant, you will be faced with a document, hopefully, designed to protect both you and the other party. Ideally, a contract allows the parties to define, in specific terms, the extent of their obligations to each other relative to the delivery of products or services and payment terms. When the contract is signed, it generally cannot be changed unless both parties agree. Consequently, it is important to protect yourself prior to signing a contract by understanding exactly what it is you are committing yourself to. Use the following list as a general guide. Make sure that contract terms are workable for you. If they are not, attempt to negotiate terms that are more reasonable.
Construction Accident Topics
Construction Accident Case Evaluation
Construction Accident Videos
Construction Accident Links
- Construction Accident - National Institute for Occupational Safety and Health