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5 Pitfalls Hiding in Your Construction Contracts

Construction projects consist of many moving parts and require coordination between multiple parties within a short amount of time. One useful tool for project managers is the construction contract, useful for both big and small projects. This legally binding agreement lays out the terms of a construction project for both the contractor and the client.

What is a Construction Contract?

A construction contract is a legal document intended to manage, mitigate, and allocate risk to the appropriate party. In the construction industry, this legally binding document heavily outlines the scope of a construction project so the contractor, subcontractors, and the client understand the deliverables associated with the project, which helps to avoid disputes further in the building process by following construction law.

Contents of the construction contract differ between projects based on the client needs, but all construction contracts have one thing in common. For legal reasons, these documents exist to communicate a set plan and project expectations while protecting the contractor and client over the course of the project.

Some of the most common types of construction contracts include lump sum contracts, time and materials contracts, cost-plus contracts, unit price contracts, and guaranteed maximum price (GMP) contracts. No matter which of the many types of construction contract template you choose to use, there’s a contract that fits your specific needs.

Who Uses Contracts on Construction Projects?

A variety of professionals use contracts on their construction work to manage risks and determine terms and deliverables.

  • Commercial construction companies
  • Residential construction companies
  • Construction managers
  • General contractors
  • Clients
  • Builders
  • Construction lawyers
  • Landowners
  • Job site managers

Common Construction Contract Mistakes

There are crucial functions many people overlook and common mistakes they make and when creating construction contracts for jobs. Below are aspects of construction contracts that require extra attention as you build out construction contracts for your project through QuickBooks for construction.

1. Leaving out clauses that protect contractor and client

When you forget to include clauses that protect all parties, you unnecessarily increase liabilities associated with your project. There are three key clauses that are critical for protecting you and your client: Stop of work clause, stop payment clause, and an act of God clause.

The stop work clause, when used correctly, gives you the legal right to cease working on the project if you haven’t already received payment from the client. On the other end, the stop payment clause gives the client the legal right to withhold payment if the contractor fails to meet established benchmarks, or if the work isn’t of the right calibre. An act of God clause determines how the contractor and client will continue work when faced with natural circumstances outside of human control.

2. Inaccurate information

It’s important to accurately provide titles and descriptions of your project in contract documents and agreements, which ensure that everyone knows what to expect and how to maintain standards throughout the course of the project. By including clear verbiage on project expectations, you can ensure that everyone involved with the project is aware of the expected work timeline and completion date.

It is also wise to include details on what will happen if deadlines are not met. Using different types of contracts can help make sure the information you’re including is relevant to the type of construction project with which you’re working.

3. Not clearly defining pay structure for jobs

Many negative consequences arise when pay structures for jobs are not clearly defined. For construction contracts, it’s important to clearly and accurately define the payment schedule and estimate of actual cost for the entire project, up front. When this is done correctly, you can avoid underbilling, frustrating your client, and even losing business. It’s also helpful to let your client know the cost estimate quote before the contract is even drawn up. This provides a clear projection of construction costs so your client knows what to expect.

If needed, you can implement a fixed-price contract. This means that prior to beginning work, the owner and contractor agree to the scope of work that will be done, as well as the total cost of the project. Another option is a guaranteed maximum price contract, which sets a limit on the maximum price a customer will have to pay their contractor or subcontractor. These contracts provide the property owner with a high level of cost certainty prior to starting the project, avoiding frustration and miscommunications down the line.

4. Ignoring change provisions

In the construction industry, external factors like pricing, weather, customer decisions, and procurement of materials lead to variability during the project timeline. As projects begin and continue, changes inevitably occur. When drawing up construction contracts, you should include project changes and change order provisions that explicitly detail how any changes made to plans and building specifications are to be handled by the contractor.

These provisions dictate the method by which you can notify the contractor of any plans made to original specifications and the procedures the contractor must take to notify the client of any changes made to the original plans. By including these provisions, you can ensure that both parties are insulated against spontaneous changes with no protections.

5. Mistakes with risk allocation

Contracts are created to allocate risks to the appropriate party. Both contractors and clients hold the responsibility to understand exactly what risk is being assigned to them before even signing a contract. To mitigate risk, some contractors will add a contingency.

Often, a contingency is added to the bid price when risk is shifted to contractors so that they’re partially covered if an incident occurs. Don’t overlook indemnity provisions, which are another option that allocates risk by obligating one party to pay for the losses incurred by another party. These provisions are meant to hold one party harmless for the losses of another.

See How QuickBooks Can Help You With Your Construction Accounting and Operations

Whether you need to manage job costs and contractors or track and create contracts, QuickBooks provides dynamic solutions for those in the construction industry. Get paid on time with this free construction invoice template to download. Learn how QuickBooks for construction can support your construction accounting and contract management. Try QuickBooks for free today!

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