What Is a Building Contract in Construction

A „base date“ is a reference date from which changes in status can be assessed. In a construction contract, the inclusion of a base date is typically used as a risk-sharing mechanism between the owner and contractor for changes that may occur between the offer price and the contractor`s signing of the contract. This period can potentially be very long and the changes that occur can have a significant impact on the cost of the work. [22] These contracts sometimes include incentives to reward the contractor if the contract is entered into prematurely. These agreements may also include penalties, sometimes referred to as „lump sum damages,“ for an order that is executed late. Owners typically use these types of contracts to avoid change orders for additional or open-ended work. The economic effect of a contract is to shift or spread risk. For example, a builder who enters into a contract with a building material supplier to purchase two by four at a fixed price at a later date transfers the risk to the supplier-seller that the price of two by four will increase between now and the date of future purchase. Similarly, the builder-buyer assumes the risk that the price of the two by four decreases. A construction contract is an agreement between a builder who wants to have the construction carried out and a general contractor. This type of contract describes the scope of the Contractor`s work, including its right to subcontract the Work, how and what it charges for the Work, and any applicable work plans or orders. Construction contracts are typically divided into four main categories: contractors have a handful of responsibilities when it comes to legal and regulatory matters. They must obtain all necessary permits and licenses before starting the project, while paying all applicable fees and taxes.

In addition, the entire construction process must comply with local legislation and building regulations. The American Institute of Architects (AIA) and ConsensusDocs both create standardized contract documents in a variety of formats, including the types of contracts here. Working with an existing professional contract template can give you peace of mind that many other parts of the construction use the same terms and conditions. There are many additional benefits to having a written contract for a construction project. Even if the parties „trust“ each other, a written contract at the beginning of the project contains a clear roadmap on how the parties will proceed in carrying out the work. This ensures that the project runs smoothly and reduces the risk of potentially fatal problems. Without this written roadmap, each party may have certain assumptions about what the agreement is or how the other party will behave in a particular situation. These assumptions are often false and can prove fatal for a project. Contractors carry out their duties by planning activities, supervising workers, and ensuring that the project complies with local regulations and laws. A contractor can hire subcontractors for specific areas such as electrical installations and HVAC systems.

In general, a contractor is responsible for planning, managing, executing, monitoring and inspecting a building construction project. Responsibility extends from the beginning to the end of the project, regardless of its scope. However, some legal requirements cannot be changed contractually, even in writing. An example of this is the limitation period, which governs how much time a party has after a dispute to make a claim in court. As a general rule, Contracting Parties may shorten this period (at least, usually not less than one year), but the Parties may not extend this period. Lump sum contracts, also known as fixed-price contracts, are the most basic type of construction contract. This is because they set a fixed price for all the work done between them. For this reason, lump sum contracts are extremely common in the construction industry. There is a good chance that most contractors have signed several lump sum contracts in the past. This type of construction contract is usually evaluated quite positively by contractors.

There seems to be no risk of losing money on materials. Plus, you know you`re going to make a profit. These types of contracts are especially useful if you don`t have enough information to make a thorough estimate of the work, or if the scope is not clearly defined. They also prioritize quality. This is a type of negotiated contract where actual and direct costs are paid and additional fees are charged for overhead, and profit is usually negotiated between the parties. The owner has more control over the project; However, the risks are transferred to the owner. [11] Sometimes another type of construction contract may also contain a GMP provision. For example, a cost-plus contract could include a clause that limits the total cost to a guaranteed maximum price.

A cost-plus contract with a guaranteed maximum price is an example of this. The owner is assigned the risk of cost overrun up to the maximum guaranteed price. If the maximum guaranteed price is exceeded, the risk or burden of cost overruns for every dollar exceeding the maximum guaranteed price will be transferred to the contractor and builder. Unit price contracts are useful for projects where the work is repetitive, highly dependent on the cost of materials, and the amount of work is unclear before the project begins. T&M contracts help the owner budget for total cost while reducing risk on the part of the contractor in the event of fluctuating material and labor costs. They also help prevent cost-cutting methods, as the entrepreneur knows that he will make a profit. Many construction contracts follow a certain format to ensure that the right information and details are included. They may also contain certain clauses that protect the general contractor and/or the promoter. One example is an escalation clause, which is typical for a larger construction contract that lasts a year or more.

An escalation clause protects the contractor from a price change for certain materials and ensures that he is not responsible for additional costs after the contract is signed. Here are examples of escalation clauses in construction contracts: For a complex project, there can be and there will usually be several contracts at the same time. The most obvious and common is the contract between the owner (or developer) and the general contractor (or builder). In addition, if a design professional is involved, there will be a contract between that party and the owner (or, as is increasingly common, between the design professional and the builder in the case of design-build contracts). If the builder hires subcontractors instead of doing everything himself (the former is much more common), there will be subcontracts between the builder and its subcontractors (called „first-level subcontractors“), and there are often additional contracts between first-level subcontractors and their second-level subcontractors, and therefore at all levels. Cost-plus contracts, also known as reimbursement contracts, involve the owner paying the contractor the costs incurred during the project plus a fixed amount of money for profit, which can be determined by a percentage of the total project price. .