The article is written by Ansruta Debnath, a law student at National Law University Odisha. This article focuses on construction agreements, their types and the provisions that must be included in a standard construction agreement.
It has been published by Rachit Garg.
Table of Contents
Introduction
A construction contract is a written agreement between a business owner who wants to outsource work and the independent contractor or specialist who wants to do the work. A construction contract should include information regarding the construction project, its scope, and a breakdown of the jobs that will be outsourced. It should also include contingencies between the contractor and the owner in the event of delays in the project’s timeframe.
Both parties to a construction contract must be protected. These documents spell out exactly what work will be done when it will be done, and how much it will cost. They also specify communication channels and how conflicts will be resolved if they arise.
Construction contracts simplify the decision-making process by incorporating information on communication and adjustments. In an ideal world, project risks have been identified and the contract describes the best course of action. A construction contract is first and foremost a contract, but it also functions as a road map.
Construction contracts include a client or owner or property where construction will take place and the contractors, people who will perform the construction. When owners require specialised work that they cannot complete on their own, they hire builders. When the project’s scope is too large for them to handle alone, they may hire constructors. Construction projects, in particular, frequently necessitate the hiring of multiple contractors. In this situation, meticulous building contracts are critical to the project’s success.
Most important clauses of construction agreements
Construction agreements are subjective and must cater to the needs of the involved parties. But some clauses and provisions should be included in them to ensure that the basics of the agreement are not marred by ambiguities.
Identifying details of both parties
The agreement, in the very beginning, should contain the identifying details of both parties, the contractor and the property owner. These include name, office or residential address, contact details like a cell or telephone number or email ID.
Description of property and project
The property where the construction project will take place should be explained in detail. Further, the scope of the construction should be properly defined. This is the most important addition to the construction agreement as it allows the meeting of minds on the crux of the agreement. Care should be taken to make this section as detailed as possible to remove as many ambiguities as possible. For example, if an agreement is being drawn up for building a two-storeyed house, then details should include-
- Blueprints of the expected end product.
- Raw materials to be used.
- Quality of raw materials to be used.
Licences and permits
Building something on a property requires obtaining certain licences and permits from local municipal bodies. Thus, all the requirements must be properly detailed. Further, it should be specified who among the parties would be responsible for obtaining the same to ensure that there are speedy applications for the same and minimal misunderstandings.
Incentives
Creating incentives is one of the most effective strategies to ensure that a building project succeeds. When the scope is unknown and the budget, time, and personnel expenses are unknown, incentives can help. Contractors and owners alike benefit from incentives that push them to work efficiently and complete projects on time and within budget.
Projected timeline and date of completion
Ascertaining when the project must be completed is crucial. Details on when the date of start will be, the work period and the expected day of completion should be included in the construction agreement. Further, such details can be ascertained only by proper negotiation between both the involved parties so that not too strict nor too lax of a schedule is determined and put in the agreement.
Estimated cost and payment schedule
After the contractor gets a clear idea about the scope of the project, they will give a cost estimate. This should be mandatorily communicated to the other parties and then after negotiations are included within the agreement.
One of the most significant aspects of a construction agreement is the payment schedule clauses. These clauses are commonly referred to as “pay-when-paid” and “pay-if-paid” clauses. When the contractor’s responsibility to pay the sub-contractor is triggered by receipt of payment from the owner, this is known as a “pay-when-paid” clause. The contractor’s receipt of payment from the owner is a condition precedent to the contractor’s obligation to pay the subcontractor in a “pay-if-paid” agreement.
Right to stop work
The contractor can have the right to stop work in case certain obligations are not fulfilled by the owners of the property. Thus a stop-work clause gives a contractor a legal right to stop work in case payment is not done by the owner or client.
Right to stop payment
Like the right to stop work, a similar right can exist for the clients. This right can be used when the contractors have been unable to perform up to the standard or have not reached certain milestones according to the pre-determined timeline. The clients, in such cases, can reserve the right to legally stop payments until obligations from the opposing side have been sufficiently fulfilled.
Act of God
The Act of God clause or the force majeure clause is a clause that allows for parties to escape liability in case of breach of contract if the breach is due to circumstances beyond their control. For eg, during the 2020 lockdown due to COVID-19, many agreements including construction agreements had to be suspended due to the inability to continue work or payment by either party. Thus, even if the contractor is unable to commit to the pre-determined work timeline, the contract is not breached but suspended until work can recommence. It is important to note that the performance of the contract must be impossible and not “difficult” for this clause to take effect.
Contingency plans
Contingency plans are included in the finest construction agreements. During a construction job, something unexpected will almost always occur. When contingencies are included in construction contracts, both the owner and the builder have a plan in place for what to do if something goes wrong.
Change order provisions
In the industry of construction, projects frequently begin with the owner’s plans and specifications, as well as the contractor’s agreement to build them for a set price. However, plans and specifications may become incompatible during a project. The owner may wish to make changes, such as adding or removing particular goods, or the terms may differ from what was agreed upon. The project may turn out to be completely different from what the contractor committed to at the start. Change order provisions in the contract terms are frequently used to address these types of issues. They define the procedures for seeking and issuing such orders, as well as the scheduling, notification, and resolution of contractor-owner issues that can arise due to such changes.
Further, it can also be decided beforehand how changes would not be entertained in the future but it is always recommended to keep construction contracts flexible.
Indemnities
“Indemnity” in English law means a promise to save a person from the consequences of an act. The promise may be express or it may be implied from the circumstances of the case. The person who gives the indemnity is called the “indemnifier” and the person for whose protection it is given is called the “indemnity-holder” or “indemnified”. In construction agreements, the clients are generally the indemnifier.
Remedies for breach
A breach of contract occurs when a party renounces his liability under it, or by his own act makes it impossible that he should perform his obligations under it or totally or partially fails to perform such obligations. The failure to perform or renunciation may take place when the time for performance has arrived or even before that. Accordingly, remedies for breach should be pre-determined for either party involved in the agreement. Remedies can include liquidated damages, specific performance, litigation etc.
Dispute resolution mechanisms
A good contract always includes the mechanism through which disputes should be settled in case disputes arise. While litigation is an age-old practice, due to the increasing burden on the judiciary and facilitating easy redressal, parties are encouraged to opt for alternative dispute resolution methods like arbitration, negotiation, conciliation or mediation.
Warranty
It is expected that when a project is completed, it is done with integrity and that the end product will have some kind of warranty. Most agreements should feature a warranty clause, especially if the client refuses to move forward unless a warranty is given by the contractors. Further, breaching a warranty will mandatorily lead to the payment of compensation.
Disposal of materials and condition upon conclusion
Another clause that can be included at the end of the agreement is the obligation of disposing of and cleaning up the newly constructed property. The same can be clearly defined during the formation of the contract to ensure that the same obligation is placed on the contractors beforehand.
Signature and date by both parties
Finally, to transform the agreement into a contract, involved parties must sign the agreement along with the date of signing. This makes the agreement legally binding on both parties. Care should be taken by all parties to properly go through the agreement in detail before signing it.
Types of construction agreements
Lump-sum/ fixed sum construction agreement
A lump-sum agreement gives a complete price for the complete activity. This pre-determined amount accounts for all variables, irrespective of changes or problems. This form of settlement protects owners from unforeseen modifications and setbacks. Lump-sum contracts can appear to favour the owner over the contractor. But there are ways to equalise the scales. Many contractors demand a further per cent of the amount for signing lump sum contracts, as a relatively greater amount of risk is on them. Additionally, incentives are included within the agreement to reward jobs finished early.
Cost-plus construction agreement
Cost-plus agreements have a two-pronged approach: a predetermined fee and accumulated prices. This rate is the agreed-upon charge owners will pay contractors. It may be a percentage of the overall assignment fee or every other form of fee. The defining feature of a value-plus contract is it reports prices as they arise as opposed to deducting prices from a hard and fast price range. A fee-plus agreement is used when project expenses are uncertain. While this could appear as a possible legal liability, cost-plus contracts frequently include incentives for complying with a lower price range and reduced expenses. This avoids the possibility of legal battle and ensures contractors are paid a fair overhead.
Time and materials construction agreement
Time and materials agreements are a fitting choice when the scope of a challenge is completely unknown. In this situation, contractors determine an hourly rate for labour and for materials as is required by the clients. Because this connotes certain levels of uncertainty, these agreements must be unique and prepare for nearly everything by being very flexible. The owner should provide incentives for construction initiatives finished beforehand of schedule and/or beneath budget. A time and materials settlement is a superb choice for small projects, as they require such close supervision. The gain of selecting a time and materials settlement is that it protects proprietors from overpaying contractors.
Unit pricing construction agreement
A unit pricing agreement is used when an owner needs to buy a large amount of a positive product. Each product is a unit and costs a set price. These gadgets can also regularly be charged in bulk portions for a reduced rate. Unit pricing contracts are nice whilst a proprietor is aware of precisely how much of a specific product they want. Using this type of agreement and shopping for all the devices immediately is likewise a very good manner to defend against potential future inflation of material fees. By buying all of the gadgets at once, owners normally pay less than they might within the destiny and don’t need to fear approximately drawing up another contract in the future.
Advantages of construction agreements
- It is always advisable to draw out the rights and obligations of parties in a contract beforehand.
- Calculation of the costs is done beforehand.
- If appropriate clauses are added and the construction contract is drafted in the right way, then it allows for easy change of construction plans in the future.
Disadvantages of construction agreements
- Too much cost may be prescribed for the project unknowingly by the client.
- Construction agreements may not be flexible, causing problems.
Common mistakes made while drafting construction agreements
- Not being specific or detail-oriented
- Not establishing proper and efficient lines of communication
- Not detailing how to make changes in the contract
A sample Construction Agreement
Sample construction agreements are widely available for the benefit of everyone who wants to draft a construction agreement for an impending construction project. These samples contain certain provisions which are a must for all construction contracts. Apart from those, the contracts can be amended and sub-clauses added or removed to cater to individual needs.
The following is a sample construction agreement-
CONSTRUCTION CONTRACT
THIS AGREEMENT is made and entered into this ____ day of________, 20XX, by and between _____________________________________ (hereinafter called “Owner”), and ________________, (hereinafter called “Contractor”), for the Construction Project known as: The Owner’s Representative (OR) is _____________________________. The Owner and Contractor agree as follows:
ARTICLE 1, THE WORK:
The Contractor shall complete all the work on the _________________________ as specified in the Scope of Work included and also contained in the RFP attached hereto and incorporated herein. The Work is generally described as ____________________________.
ARTICLE 2, TIME OF COMMENCEMENT AND COMPLETION:
2.1 The Work to be performed under this Contract shall be commenced upon receipt of a Notice to Proceed and completed by ______________. Start date is anticipated to be on or about ________________.
2.2 Except as otherwise required for the safety or protection of persons or the Work or property at the Work Site or adjacent thereto, all Work at the Site shall be performed between the hours of 7 AM and 5:30 PM, Monday through Friday unless otherwise provided in writing by Owner or OR, such consent not to be unreasonably withheld.
ARTICLE 3, CONTRACT AMOUNT AND BASIS:
The Owner shall pay the Contractor the amount of _____________________ for the satisfactory performance of the Work, subject to additions and deductions by Change Order as provided in the General Conditions, the following: The unit price set forth on the Bid Schedule shall be the basis for the contract price. Payment at the unit price will be based on actual measured quantities in the Work, or planned quantities as stipulated in the Project Special Provisions, except where the unit is a lump sum, in which case payment will be based upon the lump sum price as stated.
ARTICLE 4, PROGRESS PAYMENTS:
Based upon Applications for Payment submitted to the OR by the Contractor and Certificates for Payment issued by the OR to the Owner, the Owner shall make progress payments to the Contractor as follows: Monthly progress payment requests shall be remitted within thirty (30) days of issuance of Certificates for Payment by the OR to the Owner. Ten per cent (10%) of each amount certified for payment shall be retained by the Owner until final payment.
ARTICLE 5, FINAL PAYMENT:
After completion of the Work, provided the Contract be then fully performed, the Owner shall publish a Notice of Final Settlement twice at least _________ before the date of Final Settlement. The Owner shall withhold __________________________________________ as and when required
ARTICLE 6, CONTRACT DOCUMENTS:
6.1 The Contract Documents include …
6.2 The aforementioned documents form the contract and what is required by anyone shall be as binding as if required by all. The Contract Documents intend to include all…necessary for the proper execution and completion of the Work and the terms and conditions of payment, and also to include all Work which may be reasonably inferable from the Contract Documents as being necessary to produce the intended results.
6.3 The term Work as used in the Contract Documents includes…
6.4 If any of the covenants or provisions of this Contract shall conflict with any of the provisions of the Request for Proposals or the Contractor’s proposal, then this Contract shall control and shall be the governing document. If the Request for Proposals conflicts with the Contractor’s proposal then the Request for Proposals shall control, it is the intent that the work under the project is defined in this Contract and the Request for Proposals.
ARTICLE 7, OWNER’S REPRESENTATIVE (OR):
7.1 The OR will provide _______________________________________________
7.2 The OR shall at all times have access to ____________________________________
7.3 The OR will make periodic visits to the site to determine in general if the Work is proceeding per the Contract Documents. Based on on-site observations, the OR will keep the Owner informed ____________________________________________________________________. The OR will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work. The OR will not be responsible for___________________________________________________________
7.4 Based on such observations and the Contractor’s Applications for Payment, the OR will determine the amounts owing to the Contractor and will issue Certificates for Payment.
7.5 The OR will be, in the first instance, the interpreter of the requirements of the Contract Documents. The OR will make decisions on all claims and disputes between the Owner and the Contractor.
7.6 The OR will have authority to reject __________________________________.
ARTICLE 8, OWNER:
8.1 The Owner shall provide _____________________________________________.
8.2 The Owner has secured __________________________________________________.
8.3 The Owner shall issue ______________________________________________.
ARTICLE 9, CONTRACTOR:
9.1 The Contractor shall perform the work as an Independent Contractor according to this Agreement.
9.2 The Contractor shall supervise and direct the Work, using the Contractor’s best skill and attention. The Contractor shall be solely responsible for all _____________________________.
9.3 Unless otherwise specifically noted, the Contractor shall provide and pay for ____________________________________________________________________________.
9.4 The Contractor shall at all times enforce strict discipline…
9.5 The Contractor warrants to the Owner and the OR that all materials and equipment incorporated in the Work will be new unless otherwise specified, and that all Work will be of good quality…All Work not so conforming to these standards may be considered defective.
9.7 The Contractor shall pay consumer taxes…The Owner is exempt from state and local sales and use taxes.
9.8 The Contractor shall give all notices and comply with laws…of any public authority bearing on the performance of the Work, and shall notify the OR if the Drawings, Specifications and Provisions are at variance therewith.
9.9 The Contractor shall be responsible for the…of all Contractor’s employees and all…
9.10 The Contractor shall review…approval of the OR for conformance with the design concept and with the information given in the Contract Documents. The Work shall be per approved samples and shop drawings.
9.11 The Contractor at all times shall keep the premises free from the accumulation of waste materials…
ARTICLE 10, DECISIONS ON DISPUTES:
10.1 The provisions of this Article shall govern the procedures to be followed in the event of a dispute.
10.2 The Representative shall be the initial interpreter of the requirements of the Contract Documents and judge the acceptability of the Work hereunder. Claims, disputes and other matters relating to the acceptability of the Work or the interpretation of the requirements of the Contract Documents about the performance and furnishing of the Work and changes in the Work and Contract Times will be referred initially to the OR in writing with a request for a decision. Written notice of each such claim, dispute or other matter will be delivered by the Contractor to the OR promptly after the occurrence or event giving rise thereto. The OR will render a decision in writing promptly after receipt of the submittal, allowing sufficient time for review of the matter. The OR’s decision on such a claim, dispute or other matter will be final and binding upon the Contractor.
10.3 When functioning under these provisions, the OR will remain impartial to both the Contractor and the Owner, and will not be liable in connection with any interpretation or decision rendered in good faith in such capacity.
ARTICLE 11, DELAY:
11.1 All of the Work will be completed and ready for final payment by the date specified in this Agreement.
11.2 If the Contractor is delayed at any time in the progress of the Work by changes ordered in the Work, by labour disputes,…informed…then the Contract Time shall be extended by Change Order for such reasonable time as the OR may determine.
ARTICLE 12, PAYMENTS:
12.1 Payments shall be made as provided in Article 4 of this Contract.
12.2 Payments may be withheld on account of __________________________________
12.3 Final payment shall not be due until ____________________________________
ARTICLE 13, PERMITS:
The contractor shall obtain and pay for all necessary permits and licenses relative to the Project.
ARTICLE 14, INDEMNIFICATION:
14.1 The Contractor shall indemnify and hold harmless the Owner and the OR and their respective officers… from and against all liability, claims and demands, on account of injury… if such injury, loss, or damage is caused in whole or in part by or is claimed to be caused in whole or in part by, the act, omission, error, professional error, mistake, negligence, or other faults of the Contractor or any Subcontractor of the Contractor, or any …
14.2 The Contractor agrees to investigate…In carrying out any of the provisions of this Contract or in exercising any power or authority thereby, there shall be no personal liability of the ____________________________________________________________________________.
14.3 The Contractor also agrees to bear all other costs…
ARTICLE 15, CHANGES IN THE WORK:
15.1 The Owner without invalidating the Contract may order Changes in the Work consisting of additions…
15.2 All such changes in the Work shall be authorized by a written Change Order signed by the Owner.
15.3 The Contract Sum and the Contract Time may be changed only by Change Order.
15.4 The cost or credit to the Owner, if any, from a Change in the Work shall be determined by unit prices if specified in the contract documents, or by mutual agreement.
ARTICLE 16, ACCEPTANCE OF THE WORK (WARRANTY):
16.1 The Contractor shall correct any Work that ___________________________________
16.2 No act of the Owner or the Owner’s Representative, either in superintending or directing the Work, or any extension of time for the completion of the Work, shall be regarded as an acceptance of such Work or any part thereof, or of materials used therein, either wholly or in part. Acceptance shall be evidenced only by____________. Before any final certificate shall issue, Contractor, shall ___________________________________. No waiver of any breach of this Contract by the Owner or anyone acting on Owner’s behalf shall be held as a waiver of any other subsequent breach thereof.
16.3 Contractor agrees to guarantee all work under this Contract for __________________ from the date of Final Settlement by the Owner. If any unsatisfactory condition or damage develops…
ARTICLE 17, SAFETY:
The Contractor shall be responsible for__________________________.The Contractor shall take all reasonable safety precautions and provide __________________________.
ARTICLE 18, PROPERTY INSURANCE:
18.1 Unless otherwise provided, the Contractor shall purchase and maintain property insurance upon the entire Work at the site to the full insurable value thereof. This insurance shall include______________________________________________________________________.
18.2 Any insured loss is to be adjusted with the Owner and made payable to the Owner as trustee for the insureds, as their interests may appear, subject to the requirements of any mortgagee clause.
18.3 The Contractor shall file a copy of all such policies with the Owner prior to the commencement of the Work.
18.4 The Owner and Contractor waive all rights against each other for __________________.
In witness whereof the parties hereto have executed this agreement as of the date first above written:
Signed and delivered for and on behalf of
(place for signature)
Owner Name:
Address: ______________________
Signed and delivered for and on behalf of
(place for signature)
Contractor company Name:
Director Name or Authorised person Name ______________________
Designation ______________________
Address ______________________
Conclusion
Thus, it is very clear for clients and contractors to outline rights and duties through a construction agreement before a construction project commences. With the changing landscape of the construction industry, there is a marked need to move from strict to much more flexible agreements. At the same time, a balance must be struck, ensuring that both parties are equally benefited from the agreement.
References
- 5 Key Clauses to Look Out for in Construction Contracts | LegalVision
- 19 Things Every Construction Contract Should Have | legalzoom.com
- https://www.freshbooks.com/blog/construction-contract?fb_dnt=1
- Construction Contracts: Types, Best Practices & Mistakes
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