What Is Contract Practice in Construction

Lack of communication is detrimental to construction projects. Because there are so many moving parts, everyone needs to understand their role in relation to each other. A well-written construction contract sets up a communication system and clearly indicates where to direct questions and updates. The main difference between a written contract and an unwritten contract is which terms control or define the agreement of the parties. In the case of a well-written contract, the written terms carefully and clearly define the agreement of the parties, their expectations and their respective risks and obligations. In the case of a purely oral contract, there are no written terms and conditions that have control are defined by the oral discussions or negotiating correspondence of the parties (and in the event of a dispute, the parties will invariably disagree on what these discussions were), the course of the performance of the contract (i.e. how the parties carried out the project work before a dispute), and the limited rights of default that apply ipso jure. In this article, we will look at the top 5 types of construction contracts and answer the following questions for each of them: Costs covered by cost-plus contracts can include direct costs (i.e., direct labor and materials), indirect costs (i.e., office space, travel and communication expenses), and profits (i.e., agreed fees or surcharges). A construction contract is a mutual or legally binding agreement between two parties based on policies and conditions documented in document form.

The two parties involved are one or more owners and one or more contractors. The owner, often referred to as an “employer” or “client”[1], has full authority to decide on the type of contract to be used for a particular development to be built and to set the legally binding terms in a contractual agreement. [2] A work contract is an important document because it describes the scope of the work, the risks, obligations and legal rights of the contractor and the owner. Any provision of a construction contract can be seen as a mechanism for displacing or assigning an identifiable risk. If the construction contract takes into account the construction of a structure for a fixed fee, the builder assumes the risk that forces beyond the customer`s control may cause the actual construction costs to exceed those fixed costs, which will affect the builder`s expected profit and could even result in a loss. At the same time, the owner assumes the risk that forces beyond the owner`s control will result in actual construction costs significantly lower than those envisaged or expected by the parties at the time of conclusion of the contract, which will result in an additional benefit for the builder. Unlike lump sum contracts, time and material (T&M) contracts are best suited for projects where the scope of work is not precisely defined. Time and material contracts reimburse contractors for material costs and set an hourly or daily wage rate. Since no two construction projects are the same, there are many types of construction contracts to meet the needs of everyone involved. Knowing which contract best fits the project helps owners, contractors and suppliers manage risk and ensure that work and payment go as smoothly as possible. Escalation clauses are often written in construction contracts. They are usually included in large construction projects where the contract can take more than a year and where it comes with financial support and significant risks.

For example, the possibility of economic changes such as a gas shortage or an oil glut may require contractual escalation clauses, even for small and medium-sized projects. When properly executed, escalation clauses protect the contractor from unforeseen costs. A “base date” is a reference date from which changes in status can be assessed. In a construction contract, the inclusion of a base date is typically used as a risk-sharing mechanism between the owner and contractor for changes that may occur between the offer price and the contractor`s signing of the contract. This period can potentially be very long and the changes that occur can have a significant impact on the cost of the work. [22] Suppliers are in the position of subcontractors in this system, and there will likely be a supply subcontract (sometimes no more than a purchase order) between the supplier and the contractor or subcontractor with whom the supplier deals. .