Essential Elements to a Good Construction ContractFebruary 6, 2013
In construction, one of the most important factors to consider that is often overlooked is the contract. As a General Contractor or a Subcontractor, you should be well versed in the importance of contracting. Hence the name, "contractor"!
Nobody enters into a contract anticipating a bad income….however your battles are won and lost in the contract. That is why ParsCo recommends you consider these key elements when addressing your next contract:
Payment is critical to the success of the project. Always make sure the following items are addressed:
A) When and how often payment is allowed or scheduled
B) How payment amounts will be calculated, including retainage, if any
C) When payment will be received
D) What amount of payment will be released, including retainage.
E) Who will authorized and approve payment
F) Where payment will be received and released to you
The contract documents are the specific documents (plans, specifications, etc…) that dictate what your contract work is based on. Since your pricing is based on these documents, always make sure you reference these in your contract.
So many times, this is overlooked and can truly be a big deal when information is passed around or directives are made without proper authorization. Always make it clear in the contract who has the authority to make binding decisions, changes, and issue directives. Also be sure to identify what type of authority the different representatives involved in a project have so the roles/responsibilities of each party are clearly identified. Address this issue before you sign the contract and things should run a lot smoother during the progress of the work.
As much as everyone dreads the word "Change Order", it is tough to complete a project without them. Always make certain that the key basic elements for change orders is addressed:
A) Who you have to notify and receive permission from for change order work
B) When and how do you have to notify them of potential change order work
C) What documents do you have to provide
D) How and when the change order work will get paid
E) Where the additional funds will come from for the change order work
F) What is the reasonable time for approval and what is the additional cost for your delays are while you’re waiting for approval
G) How you and the owner will resolve the change order issue if immediate approval for the work is not received in the agreed time
Remember, change order work is not “extra work”. It disrupts the progress and productivity of the work as you had originally planned for when you bid the work. It is not your fault nor your responsibility, and you should be justly compensated for this unanticipated disruption.
Schedule of the Work
Estimated costs to do projects typically are based on labor and production. Therefore, it is wise to reference the schedule in your contract. Make sure your schedule represents the way you bid the work, otherwise you may face overtime costs and other factors that will reduce your intended profits. Also, make sure you differentiate the schedule between calendar days and work days. Establish a clear Notice to Proceed Date, the start of construction and date of completion date on a calendar. The following information should also be included in the contract:
A) You are not responsible for delays caused by the owner in obtaining the required permits, easements, approvals, permissions, etc., to do the work.
B) You are not responsible for delays caused by others
C) You are not responsible for “Acts of God”
D) You are not responsible for inclement weather
E) You have included adequate time for long lead items (Be specific and tie this into your supplier with whatever documentation you have received from them)
Always be sure to identify in your change orders the time impact. Many times the cost is the only item contractors consider, but when it comes down to it the change may in fact delay the overall completion date.
Some owners will even have “liquidated damages” or penalties for being late or even bonuses for early completion. Make sure that scheduling has been properly included in the contract.
A well-drafted construction contract clearly sets out the work to be done, the price to be paid for the work, and the terms and conditions of payment. The contract should also allocate various foreseeable risks between the parties. When the parties allocate a list of potential risks, the contract becomes longer, but it reduces the potential for disagreements in "gray areas" that are not addressed at all – assuming that both parties take the time to read and understand the lengthy, dryly-worded document. Failure to read a written agreement is not a valid excuse, so at all times it should be taken seriously.
For all of your contracting needs, contact ParsCo at 850-776-6265 or email us at email@example.com
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