5 Essential Elements of a Construction Contract

Crafting a construction contract is a nuanced and oftentimes complex endeavor, but no contractor should ever engage in any type of construction work without having one in place. Like the structure they are seeking to build, these kinds of contracts will be unique and customized, but they should always include certain elements no matter the nature of the job. Here are five essential things that should be included in your construction contracts:

1) Timing

When it comes to construction, time is almost never a known quantity or something that either party has unlimited amounts of. The parties should negotiate and put into the contract a specific time frame for both various milestones of construction and ultimate completion. Many times, contracts will also have financial penalties for contractors who take too long to complete construction.  

2) Pricing

In commercial and municipal construction contracts, the price of construction can be categorized in several different ways: a set, flat price that includes everything; a price-per-unit; or, some kind of hourly rate. Each has its own benefits and drawbacks, and both parties need to understand those ramifications before committing to one pricing scheme in particular.

3) Terms of Payments

Just as it is important to determine the pricing of the contract, it is also very important to determine the schedule and terms of payment. If the contract calls for a lump sum payment, will the entire payment be withheld except for payments for materials, until construction is complete? For a price-per-unit contract, will payments be made on a monthly basis or when certain milestones are reached? These are all considerations that need to be decided ahead of time.

4) Insurance and bonds

In Washington, the contractor must be registered with Labor and Industries, which requires a small bond and insurance. Bonds may cover a multitude of situations including performance, bidding for commercial contractors, payments for subcontractors, maintenance (i.e. a workmanship warranty), and supply.  For small residential projects (remodeling, new construction for one home, etc.), the state required bonds are typically all that is required by the owner.  We recommend requiring performance bonds for larger residential projects to protect the owner.     

Commercial and public works projects will likely require specific bonds for the project in addition to the state required bond such as performance and payment bonds.  Performance and payment bonds are particularly crucial as they assist in motivating the contractor to finish on time and ensure that subcontractors, payroll taxes and union benefits (if applicable) are paid in full. Claims on performance bonds are only available to the property owner only-not an HOA or subcontractor. For payment bonds, the subcontractors, state agencies and unions may make claims for nonpayment.  

5) Warranties / Statute of Limitations

The contract should set out what warranties come with various products and what is not covered by these warranties. Washington State allows for express warranties to be made in construction contracts. These may be in addition to other warranties that are implicated but may not be specifically set out in the contract such as the implied warranty of habitability and workmanlike construction. The express warranty provision should cover how long the warranty will last, what can void the warranty, and other exceptions or restrictions. The statute of limitations should set forth the time in which the owner has to bring a claim against the contractor for a breach of the warranty that he has provided. These limitations may be in addition to any statutory limitations set forth in the Washington Revised Code.  

Another essential element in drafting a good construction contract is having a competent and knowledgeable attorney working your behalf. So, if you’re thinking about entering into a construction contract or have questions about an existing contract, contact APH Law PLLC today to set up a consultation.

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Written by APH Law PLLC

APH Law PLLC

When we founded APH Law PLLC in 2010, we did so out of a desire to connect business owners with more and better opportunities. No matter what industry you’re operating in, creating a strong foundation, preparing for the future, and protecting against challenges are key to long-term success. It is this kind of support that we take tremendous pride in helping businesses.