What Is a Construction Contract?

A construction contract is an agreement between a client that wants construction done and a general
contractor. This type of contract details the contractor's scope of work, including their right to
subcontract any of the work, how and what they will charge for the work, and any applicable plans or
work orders. Construction contracts are typically split into four main categories:

Fixed price: A contract that includes a set price or lump sum fee for all services provided, including all
labor and materials

Unit pricing: A contract that outlines the cost per unit, such as the cost per square foot or another
measurement unit

Time and material: A contract that requires the client to pay the contractor for all labor and materials at
a pre-negotiated rate, which is higher than what the contractor pays their staff

Cost-plus : A contract that requires the client to pay the actual cost for the labor, materials, and other
expenses, as well as a fixed fee or percentage of the total costs

What's Included In a Construction Contract?

A strong construction contract should outline the scope of the project in as much detail as possible to
leave little to no room for confusion on either side. This type of contractor often includes individual
documents that detail the various aspects of the project, such as who will be responsible for performing
certain tasks, the expected project timeline, payment terms and cost requirements, and other important
details. It is typically executed between the general contractor handling the project and the owner of
the project or building being construed.

Subcontractor details are often included in a construction contract as well when a contractor plans to
hire out some of the work on the job. A general contractor may handle some or all of the tasks
associated with a construction project, or they may bring in other companies and individuals. When
subcontracting, the general contractor is responsible for managing contracts and payment terms with
the subcontractors. The owner of the project does not generally interact with subcontractors.

Construction Contract Clauses

Many construction contracts follow a certain format to ensure that the proper information and details
are included. They may also include certain clauses that protect the general contractor and/or the
project owner. One example is an escalation clause, which is typical on a larger construction job that will
take a year or longer to complete. An escalation clause protects the contractor from a price change on
certain materials, ensuring that they aren't responsible for the added cost after the contract has been
signed. Examples of escalation clauses in construction contracts include:

Oil-based products
Steel

Fuel and gas

Contract Negotiations

After a construction contract has been drafted and reviewed by all parties, the next step in the process
is often the negotiation process. During this process, the involved parties will bring up areas of concern
within the contract and make requests. If the other party or parties agree to the requests, those changes
can be made within the contract. If disagreements come up, the parties may have to make
accommodations or compromises to ensure satisfaction on all sides. Negotiating a contract can be done
via email or in person.

Construction Contract Common Language

Construction contracts will often include key elements and common language. Some examples of these
contract elements or language components include:

General contractor: The company or individual responsible for overseeing the construction process and
managing any subcontractors, if applicable

Owner: The individual or company hiring the general contractor and entering into the contract to have
construction work done

Job site: The physical location where the construction work will be completed (may be an address or
description of a location if no address is available)

License number: The number issued by the state licensing board to the general contractor, indicating
their legal status to work as a general contractor and provide the services outlined in the agreement

Description of work: An outline of the scope of work planned for the project (may include specifications,
plans, portions of work being hired out to subcontractors, and other critical details)

Contract documents: Any related documents, such as blueprints, designs, exhibits, drawings, renderings,
or similar components related to the work being done

Price and payments: The cost for the work outlined in the agreement, as well as payment terms (how
and when the owner will make the payments to the general contractor)

Labor and materials: Who is responsible for procuring the materials, as well as any costs associated with
the labor and materials needed to complete the work

Timeline: The planned start and end date (may include details about when certain tasks will be complete
or any phases planned for the project)

Permits and licensing: Outlines which party is responsible for requesting and obtaining any necessary
permits and licensing to complete the scope of work
Change requests: Describes how any requested changes will be communicated to the general
contractor, as well as any fees required for change orders and timelines for when changes can be
requested and handled

Warranty coverage: Whether the general contractor provides any type of warranty on the work and the
period of time in which the work is free from any material defects

Depending on the scope of the project, a general contractor may include additional components or
language elements:

Indemnification: The responsibility of the contractor for any damages or loss incurred by the owner due
to the work of the contractor

Termination: When either party can legally terminate the contract and any penalties that may apply to
the decision to terminate

Inspection: The right of the owner to inspect the work being completed to ensure that it aligns with the
terms stated in the construction contract

Dispute resolution: The acceptable methods for resolving any disputes that may arise before, during, or
after the construction process, such as arbitration, adjudication, or mediation

Insurance policies: Which party is responsible for obtaining insurance to protect against losses and
damages, as well as any minimum value requirements for insurance policies