Construction contracts are significant in managing your projects and ensuring your company’s profitability and reputation. A thorough, legally binding agreement protects workers and other parties from these risks and keeps them from losing money or being sued in the future. However, many people do not like contracts because they are often time- and paper-consuming. Even in today’s present times, many contractors still do not utilize its power and benefits.
If something goes wrong, neither your business nor your customers are protected by the law if no contract exists. This can lead to conflicts, delays, and other problems that cost a lot of money and can stop a whole project. Even just going to court can cost significantly and harm your reputation.
In this article, let us learn about the different types of construction contracts and how they can ensure the success of your next home-building project. Let us dive into the building contracts and what general contractors need to know to keep themselves safe on their projects.
What Are Construction Contracts?
In a nutshell, a construction contract is an agreement between two or more parties, usually the owner and the builder. It lists the exact tasks or deliverables needed, how much each party is responsible for paying, and any other essential terms to the project. It is the basis for the scope, budget, and schedule timelines.
It is an integral part of any job because it spells out how disagreements between the parties will be resolved.
What is Construction Contract Management?
In construction, managing contracts management monitors and manages the agreements made by different people working on a project. It includes negotiating a contract’s terms, ensuring that the agreed-upon conditions are followed, and helping to settle disagreements.
There are many goals for managing contracts correctly in building projects. We have listed here five of the common goals:
Managing Schedule
Ensuring the job gets done on time means meeting all the project’s goals and deliverables by the agreed-upon due dates.
Maintaining Budget Control
Monitoring and controlling costs to ensure the project stays within the budget.
Maintaining Quality Standards
Ensure that all work meets or exceeds the standards in the deal. Legal and Regulatory compliance means ensuring that all actions related to the contract comply with all laws, rules, and industry standards.
Helping People Communicate
This is where all contract parties can talk to each other to solve problems and changes quickly.
Why Is Construction Contract Management Necessary?
Contract management is essential when managing construction because it sets the rules for how projects are carried out and finished. Not only does it help you keep track of all the budget and deadlines, but it keeps the project completed on schedule, within budget, and of the highest quality possible.
Good contract management also ensures that contracts follow the law and quality standards, lowering the chance of disagreements and project failures. Let us look at five reasons why contract management is essential to construction.
Keep Costs Low
Contracts help keep building costs down by clearly dividing costs between the client, the general contractor, the subcontractors, and the vendors. This ensures that everyone involved pays their fair share of the project costs and protects them from losing money without expecting it.
For construction projects to be cost-effective, they need to have good contract management. This makes budgets more reasonable and keeps a close eye on spending. Any changes that are made to the budget can be found and fixed quickly. In short, contract management helps ensure that money is spent wisely, with the least waste and the most value.
On-Time Delivery
Good contract management ensures that construction jobs are finished on time. The contract sets clear goals and deadlines so all parties know what is expected of them and when it is due.
You can conduct regular checks and changes to keep the project on track. This way, you can manage your project in a way that reduces delays, saving time and money.
Adhering to Legal Requirements and Local Regulations.
Legal requirements must be followed at all times during construction tasks. Contract management helps ensure that all work follows all local, state, and federal rules. This includes rules about safety, the environment, and building codes.
Ensuring High-Quality
Another important aspect of contract management is quality certification. The contract spells out the final products, the quality of materials used, and the standards for work to be done. The project meets or beats these standards with the help of regular checks and tracking.
Solve Disputes
No matter how hard we try, disagreements happen on building sites. A conflict resolution clause should be included in every contract so that differences can be settled in a certain way. Mediation, arbitration, and going to court are all popular ways to resolve disagreements.
Three Types of Construction Contracts
Before you work with your lawyers to write anything, knowing what kinds of construction contracts are and which suits you and the project is critical.
In this section, we have listed three of the standard contracts used in construction.
Guaranteed Maximum Price Contracts
People often use this kind of contract when they need clarification on what the work entails, which has several benefits. It guarantees the worker a maximum fee, even if costs increase or the job’s scope grows without warning. In short, the contract price has a maximum amount, and it is up to the contractor to work around the budget.
On the other hand, the client knows that their budget will be pushed only a little. The problem with this kind of contract is that contractors need to have a reason to keep an eye on costs because they know how much they will be paid, no matter how much they spend on the job.
Lump Sum Contracts
For fixed-price or “lump sum” contracts, the builder is asked to give a detailed estimate of the total cost that will also be used as the contract price. With this deal, the homeowners will have peace of mind about their budget because they will know exactly how much they will pay upfront.
A lump sum contract usually includes a single fixed fee for all the services provided by the contractor. What is included in the job must be clear and accurate from the start.
Unit Price Contracts
When working on long-term projects, like building infrastructure, where it is hard to get an exact cost estimate at the start because of things like quickly changing weather or changes in the prices of materials during the project’s timeline, unit price contracts are often used.
Unit price contracts help ensure that all the labor and products used are paid fairly for each finished unit. This means that both parties agree on a fair rate for each task before they start working, but they can still be flexible.
What Information Should Be Included In a Construction Contract?
Construction projects involve a million moving parts, so handshake deals do not work in buildings. A firm contract is the only way to keep your business safe and profitable. In this section, let us look at some items that should be included in a contract.
Delivery Method
The delivery method sets the plan for at least three people: the owner, the designer, and the contractor. This will set the tone for how the project will be delivered and its scope, size, or specific tasks that need to be done. In this part of the document, you should spell out the contractual ties and the papers you need to finish the building.
Specific Details
This part of the contract must include all the financial details, such as the total price, draw plan, the deadlines and milestones, and a list of documents that are part of the agreement.
As the general contractor, you must be clear and ensure that the papers you and your clients use are identical.
Warranties and Aftersales
In this section, the contractor and the homeowner should discuss all the warranties that can be availed once the project is completed. The construction industry has many moving parts, so it is essential to know the warranties in case something needs to be fixed.
Indemnification
An indemnification clause helps one party get paid for any harm or loss caused by any party’s acts. The wording shifts responsibility from one party to the one who caused the loss or damage.
Loans and Insurance
In this part, you’ll list the coverages you need and, if necessary, add text that says the homeowner is still covered for the work being done.
Change Order Process
Change orders are standard in construction, so keeping track of all the changes is critical. However, this is also often when most disagreements happen.
Suspension
Each party must agree to this rule before they can back out of the deal or change the terms of the agreement.
Dispute Resolution
If there is an argument between the parties, having a way to settle it, like mediation or arbitration, in your contract will ensure you are ready.
Force Majeure
This clause relieves one party of contract responsibility when events that are out of control occur.
The Process of Managing Contracts
In this section, we have listed down the significant steps in a contract management process. Knowing the main goals of each stage is essential if you want to run a building project well and lead the project to success.
Get Ready For The Contract
Before the project starts, the pre-contract preparation sets the tone for what will happen and occur throughout the project. It is critical to itemize the goals of what you want to happen in the project, such as:
- Check out the project’s size and reach.
- Do studies of feasibility
- Make rough budget estimates
Review of the Proposals and Bids
A proposal request is made and sent out during this step, and then the bids are evaluated. The main goal is to find qualified contractors and evaluate their bids using a set of fixed standards. The end of this part comes when the winning bid is chosen.
Writing and Awarding Contracts
The main goal is to make and then finalize the contract that will govern the project. Here, both sides discuss the terms, conditions, and details, like when things need to be done and how much to pay. Once everything is set in stone, the contract is officially given to the chosen builder.
Project Initiation
Project initiation is also the official start of the building work. During this time, there is usually a kick-off meeting with all the important people involved. The goal is for everyone to fully comprehend the contract’s conditions, steps, and due dates.
Execution and Monitoring
Building work takes place during the execution and monitoring stage. This stage includes monitoring progress closely, ensuring quality, and following rules. Managing contracts for building projects requires the most work and is the busiest.
Dealing with The Budget
The financial side of the project and any changes to its scope need to be managed meticulously. This includes monitoring budgets, authorizing payments, and handling changes to the original contract’s terms. The goal is to keep the job within its time and money limits.
Project Completion and Review
The last step marks the end of the building project. At this step, completion certificates are given, the previous payments are made, and the project’s success is evaluated. Documenting lessons learned is a common way to keep them handy for later use.
