Importance of a Contract
The importance of having a well-drafted contract on large, complex commercial construction projects is obvious. But a solid contract is just as important for small home construction projects such as a kitchen remodel, bathroom renovation or construction of a small addition.
Embarking on a seemingly simple home improvement project without entering into a formal agreement can be a costly mistake because many of the same issues that arise in large commercial projects occur in smaller home projects. Well-drafted contractual agreements define the scope of the work, memorialize the parties’ obligations, and allocate risks, which can reduce the cost of miscommunication and disputes.
Sources for Written Contracts
Oral contracts are sometimes successful, but a written agreement clarifies the terms of the agreement and requires the parties to fully contemplate contractual terms before commencing work. For this reason, we almost always recommend that the parties enter a written contract.
Several industry associations and the parties’ own custom documents are useful sources for contract templates. As with almost everything else in this digital age, construction contract templates can be found for free on the internet. Some of these available forms are reasonable and cover the essential terms discussed on this page. As with anything else that is free, however, you may “get what you pay for.” Contracts pulled from the internet that are not complete, appropriate,
or tailored to the specific work required can create their own set of problems.
For a fee, industry associations such as the American Institute of Architects (AIA) and the Associated General Contractors (AGC) offer a variety of standard contractual agreements often used in construction projects.
These industry form agreements are used every day in the commercial construction industry, but consumers should still take care to modify these templates to fit their specific projects.
If you are not comfortable with tailoring the template forms, you can contact an attorney to modify a standard agreement or draft a custom agreement to fit the parties’ needs and ensure that intentions are clear and the parties are appropriately protected.
The following essential terms should be included in construction agreements, regardless of the size and scope of the project: Scope or Work, Project Cost and Payment Terms: The work that the parties agree will be performed, also called the scope of work, should be included in the agreement. The scope of work can be defined in words and with construction drawings, but should clearly detail the work, the materials to be used, and any special instructions or requirements for the completed project. The total agreed price to be paid for the scope of work should be clearly and simply stated to avoid confusion and disputes regarding the cost of services included under the contract. Additionally, a schedule of payments and the work to be completed for each payment should be plainly outlined.
Schedule of Work and Completion Date: The agreement should establish a construction start date and project completion date. If completion on a date certain is crucial for one or both parties, the contract should indicate a date certain for completion and state that “time is of the essence of the contract.”
The contract should also outline the consequences of delays to project completion by either party, including delays caused by changes to the scope of work, and delays caused by third parties or circumstances beyond the parties’ control.
Changes: A clear procedure by which changes to the scope of the work can be made is important for the protection of both parties. The project owner must have the right to make changes in the work so he or she can adequately address any issues that might arise. However, the owner must be aware that such changes can have impacts to the cost and duration of the project. To avoid later disputes over the scope, cost and time impact of changes, the agreement should provide that change orders must be in writing and signed by both parties. Additionally, the change order provisions should specify a method for determining the contractor’s compensation (potentially including additional time and costs) for the added or changed work.
Termination of Contractor and Associated Remedies: The procedure and grounds for termination should be clearly stated. Typically, contracts require that the owner provide written grounds for termination and allow the contractor a period in which to cure the defaults. If not cured, the owner may terminate the contract and exclude the contractor from the site. The contract should also specify the grounds under which the contractor can terminate the agreement, typically for unexcused nonpayment by the owner. A well-drafted agreement will detail the remedies available to the parties after termination.
Indemnity and Insurance: Indemnity and insurance provisions help allocate the risks associated with an unexpected incident and may significantly impact the practical outcome of a dispute between the parties. The contract should set forth the types of insurance required, including the coverages and deductible amounts, and the length of time the coverage must be maintained. Indemnity provisions create a contractual agreement which obligates the contractor to protect and indemnify the owner from legal consequences of an action or inaction by the contractor on the project.
Even on a small construction project, disagreements can develop over the cost, time, or scope of the work. Having a written agreement clearly setting out the parties’ expectations will reduce the chances that such disagreements turn into costly disputes.
BY Scott W. Kowalski & Kaitlyn E. Martin