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What is a Construction Contract?

By Carol Francois
Updated May 16, 2024
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A construction contract is a legally binding agreement between two parties on the details and cost of a construction project. This type of contract covers very expensive, complex projects and simple renovations. There are two types of clients that use construction contracts: residential and commercial. Each client has different requirements that determine what is included in the contract.

A residential construction contract includes three basic elements: project scope, schedule of work and payment details. The property owner who has requested the work and the project manager for the construction company must sign the contract. The project scope is a statement of exactly what construction work is included in the contract. This section should include detailed schematics, artist’s rendering, and any specific instructions. Both parties must agree that this section provides an exact representation of the required work.

A schedule of work indicates the start date, milestones, and project completion date. Review this section in detail to ensure that all the primary requirements from the project scope are included. The process for inspection and quality assurance should be provided here.

The payment details section includes the total project cost and payment dates. All construction projects are paid on a percentage of completion basis. A deposit of no more than five percent of the total costs is provided at the start of the project. The next payment is made when the predefined section of work is completed.

Commercial construction contracts vary slightly from this format, as they must include more details. In addition to the standard items provided above, a commercial construction contract has procurement process details, specifications about legislative coverage, contingency plans, and dispute resolution instructions. The principle signatory document lists all the people who are involved in the project, their role, and reporting structure. This document is especially important on a large project, as it ensures that all parties have agreed to the authorization for changes, payment, and design elements.

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