In any industry, contracts are a necessary step before starting a project. And while contracts in general have a reputation of being confusing and hard to understand, construction contracts are particularly known for puzzling those outside the industry. To combat the confusion, this guide covers ten clauses you should look out for in your next construction contract–and what you should expect to be covered by each.
Why Do You Need a Contract?
For commercial or personal construction projects, it’s a good idea to lay out the terms of work and have everything in writing. Construction projects are no different and contracts are essential before starting work with a contractor. In fact, if a contractor won’t create a legally binding construction contract, it may be a sign that you shouldn’t work with them.
When a contractor presents you with both types of construction contracts, there are ten key clauses you should be on the lookout for:
The American Institute of Architects (AIA) provides standardized forms for construction contracts. AIA forms are comprehensive and the industry standard. AIA contracts cover all the bases needed for an effective and fair construction contract. They ensure that all the important points and details are included in the contract.
Retainage is a contract clause that prevents contractors from failing to complete work or providing shoddy construction. A portion of the contract price is withheld until the project is substantially complete and the quality of work verified. In the United States, due to statutory restrictions, retainage is generally about 10%. Often, the retainage is reduced to 5% once the project is 50% complete.
Construction payment terms specify when the customer must pay. Most construction invoices base the term on the number of days after the invoice was issued. Net 10, for example, means the bill is due in 10 days, while Net 30 means in 30 days. The amount due cannot include any retainage that remains in effect. For example, if the total for the job is $5,000, and the retainage remains in effect, the customer would pay $4,500. Some contractors will also add in a guaranteed maximum price or a fixed fee so you can better budget for the actual cost of construction project.
COI stands for Certificate of Insurance and should be part of the contract documents. Contractors need COIs to demonstrate they have met legal and contractual requirements to successful complete construction services and the construction process. COIs are issued for all types of insurance, which may include Workers Compensation, Accident, Commercial and General Liability, Builder’s Risk, and automobile.
The general contractor, rather than the customer, hires subcontractors to help with construction work. Subcontractors work for the general contractor and are paid by the general contractor, usually after the general contractor receives payment from the customer. For example, a general contractor may hire a roofer as a subcontractor.
The owner, architect, and general contractor will create a punch list near the end of a project. A punch list is a to-do list of items that need to be corrected, such as repairing scratches or reworking a shoddily completed wall—and these items should be included in the project’s scope. The punch list may also include new items that are added at an additional cost.
If not paid in a timely fashion, contractors can place a mechanics lien against the property. To protect their interest, customers will require a lien waiver upon issuing payment. Lien waivers can be conditional or unconditional. They are often a set price or are issued for partial and full payments.
Change orders are common in the construction industry. A change order simply means that the contract has been amended by the agreement of the customer and the contractor. There are additive and deductive change orders. Additive change orders assign additional work to the contractor, such as adding a window, and come at an additional cost. Deductive change orders reduce work, such as not including a planned window, and reduce the cost of the contract.
Termination clauses spell out when a contract may be terminated. There are two types:
Termination for Cause: spells out the reasons a contract can be terminated, such as failure to make payment or complete work as agreed
Termination for Convenience: essentially says the contract can be canceled for any reason.
Substantial completion is a standard used to determine at what point in a project payment is due and when retainage remains if effective. Construction contracts organize the project, divide responsibilities, and hold parties accountable. By knowing these ten essential components, you are prepared to delve into the world of construction contracts.
Carlton Building Services in Hampton Roads Virginia
Carlton Building Services specializes in repairs, maintenance, renovations, remodelings and build-outs for a variety of clients in Hampton Roads, Virginia Beach, and Chesapeake areas. We have years of experience handling projects in the retail, office, and healthcare space and would love to work with you on your next project!
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