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How to Write Better Construction Contracts

Published: October 2, 2024

A well-written and managed construction contract is core to the success of your construction business. From following standard best practices for structuring the document to ensuring sound contract administration and even automating the contract management lifecycle, there are many (easy) ways to improve your process. These minor tweaks will save time and money, and ensure you’re not missing out on lost renewals or bloated project timelines. Let’s look at what construction contracts entail, how to address common issues, and how automation might further enhance your construction contracts.

What Are The Types Of Construction Contracts?

Construction contracts come in many forms. Here are a few common types:

Lump sum—The total price of the work is determined in advance based on detailed project specifications. This means the cost to the contractor is projected ahead of time, and a change order is required to change the scope or cost.
Cost plus–The contract agrees to cover the contractor’s costs, which are not predetermined, plus a certain amount beyond this to allow for profit. This “plus” fee may be determined as a percentage, a fixed amount, or as a fee calculated to encourage desirable achievements by the contractor.
Time and materials (T&M)-The contractor is reimbursed for materials and paid a set hourly rate for work completed.
Unit price – The project cost is based on itemized work tasks, priced according to a schema. It’s finalized based on how much of each work item was completed to finish the project.
Construction Manager at Risk (CMAR)—The client engages a construction manager (CM), who represents the client throughout the design and bidding phases. The CM presents the client with a guaranteed maximum price (GMP) and assumes both the risk of going over budget and the rewards of coming in under budget.
Design-build—A fixed fee is agreed on for the design and build components of a project and awarded to a single party. This type of contract is considered “design-led”—the design and construction teams are often led by a design professional, such as an engineer or architect.
Integrated Project Delivery (IPD) – Unlike a design-build contract, an IPD contract requires all specialists involved in a project to collaborate as a team throughout the process. This holds multiple stakeholders accountable rather than just one.
Joint venture—Two or more contractors contract as partners for a specific project. This doesn’t constitute a permanent business partnership but ends when the agreed work ends.

Construction Contract Best Practices

Following these best practices will enhance the efficacy of your construction contract process. Certain best practices are universal to good contracts—such as specifying key details, clarifying terms, running the document by a legal professional, and digitizing your contracts. Others should be established based on the specific construction projects and contract types your business focuses on.

Here are a few common best practices to consider:

General Terms & Conditions

When drafting a contract’s terms and conditions (T&Cs), consider these best practices:

Specifications and scope of work (SoW) – Be specific. Ensure every possible aspect of the work is outlined: its scope (what it does and does not include), how long it should take, methods and materials, roles and responsibilities, due dates for deliverables, and what the completed project will entail. Use clearly defined language, and don’t leave anything to chance.
Pricing & payment terms – Depending on your contract format, be explicit about the cost structure, the cost for each deliverable, the total work completed, payment due dates, late fees, and accepted payment methods. Make provisions for payment in case of a project’s partial completion (especially in the event of a premature contract termination by either party).
Contract duration – Clearly specify when the contract begins and ends and what triggers the end of the contract. This includes any start and end dates or other relevant provisions. For example, is the contract time-bound or determined by work completed? If the latter, what defines “work completed”? Also, can the contract end before full payment is received?
Scheduling—Clearly outline the work timeline, broken down by key processes, stakeholders, and deliverables. There should be as little ambiguity as possible regarding what happens when. Be as explicit as possible for things that are naturally ambiguous or contingent on unknowns. Be sure to include provisions for unforeseeable timeline changes, too.
Risk management – Clearly identify the risks pertinent to the contract, limiting liabilities where possible. Specific risks will be unique to different construction projects, but may include worker’s compensation insurance requirements, limitation of liability clauses, and provisions in case elements of the contract are deemed unenforceable by law.

Contract Documents

Clearly list what’s included in additional contract documents so that they can be easily referenced. This may include a bill of quantities (BoQ), which lists the quantities of materials and quality of work needed to complete a project. It may also include a special section that cites regulations required by law, which we discuss at greater length below.

Legal & Regulatory Requirements

Per the Construction Specifications Institute (CSI), the contract should stipulate compliance with applicable laws, including building codes, and state who is responsible for compliance (e.g., the contractor, not the client.) Generally, it may not be necessary to include explicit legal citations. However, specific laws about critical issues such as health and safety or equity and inclusion may be required as an explicit citation in some jurisdictions. In any event, be sure a lawyer reviews this section along with the rest of the contract to ensure completeness, best practices, and compliance.

Project Delivery Methods

Different best practices can apply to other types of contracts. For example, the Design-Build Institute of America recommends specifying any design professionals of record, cost incentives, roles for each contracting party, communication methods, and project milestones. For CMAR contracts, McDonough Bolyard Peck advises that the CM’s pre-construction services should be explicitly stated in the contract. It also recommends a contingency for the GMP as part of the contract – accounting for scope gaps and reasonable price changes for materials.

There are as many best practices as there are types of construction contracts, so be sure to research your chosen delivery method in-depth before finalizing your contract.

Contract Administration

The contract administrator should oversee the contract lifecycle end-to-end, from design through completion and any defects liability period. According to SQM Architects, a contract administrator must be broadly experienced and knowledgeable, licensed, registered, and insured to administer contracts. The administrator should be in charge of approving and modifying the contract and any related subcontracting or supplier agreements. They should also clearly communicate relevant project requirements to the team and communicate closely with the project manager.

Common Issues & Challenges With Construction Contracts

Construction contract process management inevitably encounters many challenges. Here, we discuss three of the most common ways to address them.

Delays, Extensions or Contract Termination

Depending on the project format, the foreseen timeline for the contract may change. Construction may encounter delays tied to many causes, including subcontractor availability, supply chain issues, weather, or unforeseen legal problems. This may result in the need for an extension or, in some cases, premature termination of the contract.

Any contract should make provisions within reason for unforeseen delays or timeline adjustments. Other issues are foreseeable and avoidable. Place clear contractual responsibility on subcontractors for working by the overall timeline. Research the state of the economy and supply chain—plan for foreseeable weather issues. As a friendly reminder – consult with legal specialists to ensure your contract hasn’t overlooked anything that could affect the project’s legality.

Ensure there’s a backup plan in case the contract is terminated before the project is complete. How will work completed be evaluated and compensated? How will potential disputes be resolved?

Cost Overruns

Cost overruns are the bane of many construction projects. They do happen naturally, but unnecessary problems can arise from failure to plan.

It’s crucial not to make an overly ambitious bid that may be significantly lower than actual project costs. Bid what’s realistic, not just what wins. And keeping core materials in stock ahead of time significantly lowers the unpredictability of material cost fluctuations. This can make the stipulations in your contract more reflective of reality.

Have a plan in place for unavoidable budget issues, too. Many contracts are explicitly designed to address who’s responsible for overruns. For example, CMAR contracts incentivize the CM to keep costs within range.

Regardless of contract type, address who’s responsible for cost overruns and what is an acceptable margin of error. Explicitly include reasonable fallback plans that can control costs without affecting quality of work.

Quality Deficiencies

Poor materials or workmanship result in quality deficiencies. Many contractors cannot entirely avoid this, mainly if they rely on freelance subcontractors. Outside of reasonable preventative measures, avoid this becoming a crisis by stipulating a measurable standard of quality and the measures you will take to address any issues that arise. Also, it incentivizes subcontractors to hold to a high quality standard.