What Clauses Should I Include in my Construction Contract?

What Clauses Should I Include in my Construction Contract?

A strong construction contract also can set the expectations for the work to follow.

August 16, 2022

As a contractor, establishing a working relationship with your clients is an important first step. A big part of forming this working relationship is drafting a contract that both you and your clients sign. This contract serves as an agreement as to the scope of work you’ll be completing, but it’s so much more than that. It’s a legal document meant to protect both you and the client.

A strong construction contract not only can offer you valuable protection in court, but it also can set the expectations for the work to follow. These contracts can be long and complex, but for good reasons. Construction work is nuanced, and the contract needs to reflect that nuance. While each project is different, here are some key clauses construction law experts typically recommend including in a construction contract.

Price Sum

Often, the first thing spelled out in a construction contract is the total, agreed-upon price for the project. For example, if you are remodeling a kitchen and have calculated the total cost of all labor and materials to be $40,500, that will be your price sum, or contract sum.

With some projects, it is hard to assign a specific total price when the initial contract is signed. For example, the final price may be contingent on the number of hours worked, which can be hard to accurately predict. When this is the case, it’s common for contract law experts to recommend including a price range, and then spelling out other details that affect the final price. These details include cost per hour of labor and unit prices on certain materials.

The price sum clause should also include details about change orders. In other words, if a client changes their mind about a material to be used, or if they add scope to the project partway through, the price sum portion of the contract should specify what you’ll charge for these changes.

Contracts should specify what, if any, changes are allowed for without a change in cost. For some projects, it can be helpful to specify in more detail what change orders are permitted and not permitted. For example, if you are remodeling a kitchen, you might specify that no changes in flooring material are permitted, but the customer can change counter top materials up to a certain date for a certain added fee.

Payment Terms

Each construction contract needs to include a clause outlining your payment terms. More specifically, the contract should specify how much the client will pay and when the payments will be due. If the project is ongoing, the payment terms clause should specify how often payment is due.

If you’ll be working with subcontractors, this clause will also include information about those parties and how they will be paid. For instance, will the client pay those subcontractors directly, or will you pay them? The same goes for any suppliers. If the client is expected to pay certain suppliers separately, then this should be specified in the contract.

Your payment terms clause should also include terms associated with the final payment. When is the payment due? What finishing touches will be completed on the project before that payment is expected? Are there conditions under which the client is permitted to withhold the final payment?

The more specific your payment terms are, the more likely you are to be paid correctly and on-time. Many contractors make the mistake of being too loose or non-specific about their payment terms in the beginning. They find that as they make these terms more specific, they spend less time following up with clients and dealing with late payments.

Change Orders

Some information about how changes will be handled, financially, is typically included in the price sum clause. However, it’s also important for a construction contract to have a clause dedicated to change orders. After all, almost every construction project comes with some unexpected changes.

The exact details included here will depend on the project. At a minimum, though, the contract should lay out how any changes in subcontractors will be handled. It should specify the last date upon which the client can request changes, along with what changes can and cannot be requested. It should also state how much notice you, as the contractor, must give the client before making any changes on your end.

Claims

In construction contracts, the term “claims” refers to a request for more time spent on the project, or for more money. The client may make a claim for more time, and the contractor may make a claim for more money.

This is best illustrated through examples. Say a contractor finishes working on the kitchen, but the client does not feel the tile work is up to par. They can make a claim against the contractor, requesting that the work be finished or changed.

Another example of a claim would be if the contractor had to spend an extra 2 days on the project due to unexpected conditions at the job site. They could make a claim for additional funds from the client.

It is reccommended that a construction contract lays out the process by which either party can make a claim. It should specify the time limit for making a claim. Sometimes, the contract may give either party a certain number of days to make a claim after the problem is noticed or the extra work is completed. Other times, a contract may say that claims need to be made within a certain time period after the project is complete. For instance, a contract may specify that claims can be made for up to 30 days after the final payment is made.

The claims clause should also specify how claims are to be made. Do they need to be made in writing? Is email acceptable? Generally, a contract will specify that claims must be written out and send by certified mail to create a record.

Resolutions

While you hope that every project is completed without dispute between the contractor and the client, the truth is, disputes happen. A resolution clause is therefore necessary to spell out how such disputes will be resolved.

Generally, you want to settle disputes in the least time-consuming and most cost-effective way possible, and your contract should reflect that. Generally, a resolutions clause will state that both parties agree to try arbitration as their first means of dispute resolution. Arbitration means you and the client will sit down with a third party who will listen to both of your arguments and decide whose argument prevails.

Sometimes a contract will specify that the client and contractor agree to work with a mediator if there are any disputes. Meeting with a mediator is less formal than meeting with an arbitrator. A mediator will help the two parties work together and often compromise, coming to an agreement that works for both sides.

Whether arbitration or mediation is better for you will depend on the nature of your work, along with your preferences. Most contract law attorneys prefer either arbitration or mediation, based on their own experience. They can recommend the option that’s best for your situation and is most likely to get your disputes resolved.

Of course, if arbitration or mediation fail, then either party can take the other to court. A civil case can be filed and heard by a judge. This is a time-consuming and costly process, and it can usually be avoided if your contract is airtight.

Termination

A termination clause specifies the terms under which the contractor may opt to cancel the contract and cease work on the project. For instance, this clause often specifies that the project will be terminated if payment is not received by a certain date.

Some construction contracts will include a specific type of termination clause called a Termination for Convenience clause. This basically means that either party, or both parties, have the right to terminate the contract at any time, for any reason, or even for no reason at all. This type of clause is more common with projects that involve on-going work. Termination for Convenience clauses can be really hard to enforce, so they need to be written very concisely and specifically to ensure they are legally binding.

Insurance

The Insurance clause specifies what insurance the contractor carries and what that insurance covers. For instance, this clause would typically include details about a worker’s compensation insurance policy. It should specify the amount of coverage the policy offered, who that coverage applied to, whether subcontractors are covered, and so forth.

This clause exists not only to give the clients peace of mind, but also to assure them that all legal requirements are being followed when it comes to insurance. In some jurisdictions, certain contractors can be exempt from carrying workers compensation insurance. When this is the case, the Insurance clause should explain that coverage has been waived and explain why this is legal. Any associated paperwork can be included as an addendum to the contract.

The construction industry is vast and varied, and there are surprises with every project. For these reasons, it is important that your construction contracts are specific, detailed, and tailored to your needs and the clients’ needs. Your contract needs to give you flexibility, but also keep both you and the client within reasonable bounds. Including the key clauses above will get you off to a good start, but you may need some additional clauses, depending on the nature and scope of your work.

The best way to ensure your construction contracts are airtight is to work with a construction law attorney to write and amend your documents. Reach out to the experts at Munizzi Law Firm if you need your existing construction contracts reviewed, or if you need new ones drafted.

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