Construction Contract: How to Draft One with Your Contractor

July 19, 2019

So you have a plan, and you’ve found the perfect contractor to partner with on your home project. What’s next? Time to get down to business. And by this, we mean: it’s time to get a contract in place.

This is where things may get scary for first-time homeowners and those new to the construction process. But really, all it boils down to is basic project management and attention to detail.

Below we’ll tackle what a construction contract template should contain.

Construction Contract: In a Nutshell

A construction contract is a legal document that contains a mutual agreement between the homeowner and the contractor. It outlines and explains the entire building process, the costs involved, and clarifies expectations of what will be done by when, and how payment will exchange hands.

Do You Really Need a Contract?

In a word, yes!

Everyone’s heard horror stories of contractors simply choosing not to show up to the job site, leaving a project hanging. Or of builders who suddenly charge a massive fee far above an agreed-upon amount. What’s to protect a homeowner from such unscrupulous behavior? It’s the construction contract.

This is why you need one:

The contract specifies the scope of work to be done, the materials to be used, the plan to be followed
It pegs down a start date, a date of substantial completion, and a date of final completion of the project
It describes how contractors and subcontractors will be paid during the building process
It lays out how much the project will cost the homeowner
It explains all the expectations on the part of both the homeowner and the contractor, leading to clearer communication and less likelihood of conflict

4 Types of Construction Contracts

There are actually several different types of construction contracts. The four most common ones used today are:

The Lump Sum Contract

This is where a contractor agrees to complete a project for a fixed price. This is generally used for simpler projects where there is a limited amount of work to be done and very specific materials to purchase. For example: building a pond in the garden, or installing a hot tub on the patio. This contract can include incentives for early completion of the project, or penalties for finishing late.

The Cost Plus Contract

This is where the homeowner pays the costs of materials and labor, plus a contractor’s overhead and profit. This covers all purchases or other expenses that are directly generated from construction activity. It’s generally used for projects where the scope hasn’t been fully determined or materials haven’t been completely selected which in turn leads to an uncertain cost of materials, labor, and equipment.

The Unit Price Contract

Here, you specify the unit prices and quantities of units needed. The final price depends on how many units you need. This is generally used for construction or supplier projects where large quantities of specific items are needed.

The Time and Materials Contract

Generally used when the project scope is not well defined, this contract is where the homeowner pays an established hourly or daily rate (time) and the cost of materials or additional expenses that arise from construction activities.

Construction Contract Template: Elements of a Good Contract

So what should a construction contract look like? And what areas should you be looking at very closely before signing the dotted line?

Relationship of Parties

Of course, the first section of any legal contract is one where the parties involved are named, alongside their details and addresses, and their relationship is clarified for the duration of the project.

Scope of Work

The scope of work section in your contract is probably the most crucial part. It describes the work that your contractor has agreed to do for you, including all significant materials to be used and equipment to be installed.

Make sure the scope of work includes:

Obtaining the necessary permits
Descriptions of the materials and equipment that are to be used or installed
Drawings and specifications attached to the contract
Work that the homeowner needs to do
Work that the contractor WILL NOT do

The scope of work is the one area you should iron out as completely as possible in order to avoid any future conflicts. For example: if any confusion should arise when the construction plan or some specifications don’t match the details in the contract, you should have a clause to specify that the contract will be referred to as the controlling document.

A good rule of thumb: the more detailed the scope, the better for all.

List of Documents

For more complex projects you will need more than just a contract document. You may have construction plans, drawings, specifications, schedules, and all the various change orders that both parties agree to. All these documents which will be incorporated into the contract should be listed in this section.

Price and Payment

Here, the contract will outline how you pay your contractor, when you pay them, and how much.

This section should outline what the homeowner will pay for (A.K.A. Cost of Work) as well as what they won’t pay for (e.g., contractor personnel salaries, bonuses, other costs not permitted in the Cost of Work).

This section will also include a progress payment schedule to ensure that the project is funded in a timely manner and work continues uninterrupted. A typical contract will require an initial downpayment, after which the contractor submits an application for payment to the homeowner on a regular basis, detailing the amount of work completed during that period so that the homeowner can pay them.

Note: In California, a Contractor is only allowed a deposit of $1,000 or 10%; whichever is less. Once materials and labor have arrived onsite, only then can a contractor ask for more funds.

Project Schedule and Duration

This section of your contract will specify when the project starts, when the approximate date of completion is, and how long the project will last.

It will also define what Substantial Completion is (i.e. the point in the work when the homeowner can re-occupy the home) and how long after the date of Substantial Completion the date of actual project completion should be.

This section may also include damages that a contractor may claim in case there is any delay on the homeowner’s part, or if there is anything obstructing the work from proceeding that is not in the contractor’s control.

…And the Kitchen Sink

The final sections will involve all the legal matters and nitty-gritty of how changes are to be treated, how long the warranty lasts, and more.

A. Changes: This will cover how what happens when extra work is ordered, and how these change orders are to be priced.

B. Insurance: This covers the insurance details of the contractor as well as the homeowner’s property insurance and what is covered by each of these.

C. Warranty: This lays out how long the warranty on the contractor’s work will last and what is covered.

D. Suspension and Termination: This section outlines what happens if the work is suspended for any reason, or how to terminate the contract.

E. Dispute Resolution: Here, there should be details concerning how to resolve legal disputes via mediation, arbitration, and so on.

F. Miscellaneous: And finally a section for miscellaneous details for the project.

Contract Fears?

If you’re still dreading having to face a contract in order to get your home improvement project going, then ask questions. Any general contractor worth their salt should be able to walk you through every detail and clear up the questions you have. And if they still don’t inspire your confidence, then we’re just a call away.

Note: The Paragon Custom Builder blog only provides information – not legal advice. If you want specific legal advice on contracts, please consult a lawyer.