A construction contract is necessary if you are building, renovating, or altering a building or structure. A construction agreement protects both parties, the homeowner and the contractor engaged for construction.
If you have just decided to build your dream home, a construction contract will protect your interests in case of unreasonable construction delays and material shortages. It will put a cap on escalation and prevent costs from running out of control.
If you’re a contractor, the construction contract will act as your guide to handling any unexpected issues before construction is complete. It will also ensure payment of mobilization advance for the start of work followed by stage-wise instalments at specified intervals.
A construction contract is thus a legal document that is used to describe the services and costs associated with a construction project. A construction contract could be used for a home or business. The form and contents of construction contracts vary from project to project, depending on whether it is residential, commercial or industrial.
What is a Construction Contract?
When anyone wants to construct building or renovate their house, or any other real estate project, it is very important to make contract before commencing any work. That kind of contract is known as Construction Contract or Construction Contract Agreement.
A Construction Contract or Agreement is thus a written document that is legally binding between two parties i.e. owners of the project or building if the project is a commercial construction project and the contractors that contains everything that is agreed upon by both of the owner and the contractor.
All construction contracts should include the details of the project scope, construction schedule, and payment schedule. A construction schedule is a timeline for completion of the construction process, projected dates, and an estimated completion date.
A payment schedule should include the estimated total cost of the project, instructions on how and when payments should be sent, and whether or not a deposit is required.
Typical Elements of a Construction Contract:
The key elements that Construction Contract Agreement should include or follow are:
- It should be in writing.
- Project description
- Contract price
- Construction Schedules
- Be understood and clear between both parties.
- Include the scope of work being contracted clearly.
- Include cancellation or termination policy.
- Payment terms.
Advantages offered by Well-Drafted Construction Agreements:
A well-drafted and meticulous construction contract offers numerous advantages which include:
The primary advantage of a well-drafted construction contract is that it provides a clear road map of the project of how the parties will proceed to carry out the work. This helps to ensure that the project will run smoothly and diminishes the risk of potential and will be flexible.
It helps to guide—or even force—the parties to comply with reasonable business procedures since those procedures will be specifically mentioned out in a well-written contract and become requirements of each party.
Further, a well-drafted contract provides each party – the owner and contractor – with clear terms and conditions which helps the contractor to work as per the scope of work mentioned in the agreement.
A well-formed contract will also protect the contractor as the payment terms will be clearly mentioned in the agreement and even beneficial for the owner as he had to pay as and when work completed or as decided in agreement.
Inherent Pitfalls and How to Avoid Them while preparing a Construction Contract:
One of the major loss to the contractor is fixed contract price agreed at the initial point before commencing work. If the construction contract contemplates the construction of a structure for a fixed contract price, then the builder assumes the risk that forces beyond the builder’s control may cause the actual cost of construction to exceed that contract price, cutting into the contractor expected profit, resulting in a loss.
Other than price issues, construction contract should be timely completed by the contractor as mentioned in the agreement. If there is delay in work as mentioned in agreement, contractor have to suffer the complete loss.
Any construction project of any size should involve a written contract. But there are numerous risk issues that can be allocated by a written construction contract. It is important to understand that a risk does not have to be fully allocated to one party or the other.
The construction contract allows each party to detail the exact work to be performed and the responsibilities of each party during the course of the project. The construction contract also specifies the payment terms of the contract.
Commonly in a construction contract, risk should be split such that it is either shared or allocated to one party only up to a certain point, after which the risk is either shared or allocated back to the other party. One should always consult a legal professional in the event of entering into a contract for a construction project. It is the contract which is governed by the Indian Contract Act 1872. Hence it is always beneficial for both parties to sue others if there are any breaches in contract.