Construction Contracts: Special Considerations

Whether you’ve rented a car, leased an apartment, or signed up for a credit card, chances are you’ve signed many contracts as an adult. However, you might not have encountered a construction contract yet, and it may seem rather foreign when you first start to read through it. While it’s best to have an experienced construction law attorney advise you on the particulars, below are a few special considerations to think about when you’re getting ready to sign a construction contract.

Construction Contracts in General

A contract is a legally enforceable agreement between two or more parties. Each state has its own laws regarding the requirements for and enforcement of contracts, but many contracts must be in writing. For example, contracts for construction that could take more than a year to complete must be in writing. Similarly, construction loan financing and contracts involving the sale of improved real estate must also be written down.

While some construction contracts may be oral, it’s always best to have your contract in writing so that it’s clear what each party is responsible for, what the payment terms are, and what happens if something goes wrong. If there’s a dispute down the road, a court can more easily decide what’s fair under a written agreement.

Construction Contracts: Who Are the Parties?

An important consideration with regard to construction contracts is determining who the parties are and what their obligations are to each other. While some agreements may be straightforward – an understanding between you and a handyman – other construction contracts can be more complicated with the addition of a general contractor, subcontractors, architects, designers, and even government entities.

For example, if your construction contract only mentions some obligations between you and a general contractor, you could face serious problems if the general contractor fails to pay any of its subcontractors. In these situations, a subcontractor may come after you for payment (even if you’ve already paid the general contractor for the work), and could place a mechanic’s lien on your property to enforce payment. However, if your contract had anticipated these types of situations, you would have been better protected against this whole ordeal.

Because construction projects can involve so many different people, it’s important for the contract to articulate who these actors are and the aspects of the project for which each is responsible. That way, if something goes wrong, such as a construction defect issue, the contract can help guide the parties to some sort of equitable resolution.

Types of Construction Contracts: Allocating Risk and Making Payments

Another important consideration in construction contracts is the way payments are made and the work is completed. There are many types of contracts, and each one carries its own benefits as well as inherent risks. Below are some common types of construction contracts.

• Lump Sum or Fixed Price Contract: In these contracts, the owner pays a total fixed price to the contractor for the whole construction project. This puts much of the risk on the contractor since he or she may underestimate the cost to complete the project.
• Time and Materials: Here, the owner pays the contractor on an hourly or daily rate, plus an amount to cover materials used. This allows you to pay for the time worked, but may encourage the contractor to take more time with the project.
• Cost Plus: In these arrangements, you pay all of the allowed, actual construction expenses, plus an amount to cover the contractor’s profit. With cost plus contracts, the owner should include limits on the amount a contractor can bill.

Regardless of the exact type of construction contract you use, there are many issues to anticipate, and it’s important to know exactly what you’re paying for, how changes will be handled, and what the timeline for completing construction will be.

Have a Lawyer Review Your Construction Contract

From small home improvement projects to large investment developments, there’s plenty of potential for delays, confusion, design defects, construction flaws, and simple misunderstandings. Having a well-planned contract can ease some of the angst associated with these mishaps. Whether you’re getting ready to sign a contract, or trying to determine who’s responsible for construction gone wrong, let an experienced, construction law attorney review your construction contract before you make any final decisions.