Importance of Construction Contracts in a Construction Project
Construction and renovation projects are a big investment for all parties involved, whether you’re an Owner, a Contractor or a Subcontractor. Such projects involve risks, including but not limited to, financial risks, project delays and safety risks.
The best way of alleviating these risks and chances of a construction or renovation project running into issues is by having a well-drafted construction contract.
Construction contracts are an important tool which can provide certainty to a construction/renovation project as well as mechanisms to mitigate risks. They also define the relationship between the parties to the said project. The parties to a construction contract can be, for example, an Owner and a general contractor, a general contractor and a subcontractor, a subcontractor and a sub-subcontractor, etc.
Of many clauses that can be included in a construction contract, some important clauses to consider when entering a contract are the following:
- Scope of Work
It is important that the work be defined as precisely as possible and that any work that is to be excluded be expressly stated in the contract. Defining the work too broadly may create misunderstandings and false expectations, resulting in potential disputes between the parties in the future.
- Payment Terms
Stipulating the terms of payment in a construction or renovation project can not only assist in avoiding delays in payment and with the project, but it can also assist in ensuring cash flow throughout the project. Of payment terms to define are the dates as to when payments are to be made, the method of payment as well as interest, penalties and remedies, should payment be late.
- Project Price, Cost and Change Orders
The lack of clarity as to the project price (or the subcontract price, if applicable) can lead to significant dispute between the parties. In fact, construction and renovation disputes are most commonly related to the price and cost of the project.
A construction contract should specify whether it is a fixed-price contract or a cost-plus contract. A fixed-price contract is the most common type of contract which provides that the contractor will perform the specified scope of work at a fixed-price. Such contract can provide certainty to an owner as to the cost of the project, if finances are limited. A cost-plus contract provides that an Owner will pay the actual costs paid for labour and materials on the project. In addition to same, the Owner will pay a contractor fee for managing the project. With this type of contract, it is easier to make changes to the project. Further, an owner has the benefit of receiving all invoices to support the cost and price of the project.
Most construction or renovation project require changes to the initial Scope of Work. Terms should be set out in the contract in the event that changes are requested or required to expand the initial scope of work. Of common terms to be stipulated are the requirement that changes be agreed to in writing by way of change orders before work can commence and that the change orders specify the new scope of work, the cost of the additional work, the additional time required to perform the work, the new project schedule and new payment terms. A lack of detailed written change orders can expose the parties to further dispute in their construction project.
The above noted clauses are only a few of many important clauses that can be included in a construction contract. The type of clauses that should be included in a construction contract is case-specific. Whether you are a Contractor, Subcontractor or an Owner, consult with a lawyer before entering into any construction contract.