Don’t Forget These 8 Must-Have Components When Drafting a Construction Contract

Wednesday, 27 September
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Having a clear and comprehensive contract can help boost customer experience, increase productivity, minimize disputes, and improve earnings. Although you’ve been doing it with every project, there’s always room for improvement. When you’re drafting your next contract, make sure to include these 8 must-have components.

1.   Scope of work

The scope of work, sometimes shortened to SOW, refers to the work your business needs to complete to fulfill a given contract. You can break down the SOW into individual reports, timestamps, deliverables, and final products anticipated. This provides the foundation for a construction contract which will influence all other components. Make sure to take your time with this one!

2.   Change order process

Nobody can predict how a project will develop over time. It’s perfectly normal for unforeseen challenges, overlooked variables, or new client requests to adjust the scope of the project. A change order process clause prevents disagreements by defining how the adjustment should take place. This way, both clients and construction companies get what they need while the necessary changes are made.

3.   Payment terms

There are a lot of ways project managers throw away money, but unclear payment terms are one of the easiest to solve. Every contract should include specifics regarding the payment amounts, scheduling, methods, and penalties for late submissions. Having clear-cut payment terms gives clients a chance to meet your expectations while giving you a clear legal path for obtaining outstanding payments.

4.   Timeline

It sounds pretty obvious, but you’d be surprised how many contracts fail to specify the timeline of a project. Establishing a timeline within the contract keeps you and your client on the same page by managing expectations and establishing initial agreements. Without a timeline, you’re leaving your business exposed to criticism and complaints from impatient clients who feel things should be moving quicker.

5.   Dispute resolution

One of the keys to handling (and avoiding) contract disputes is clearly outlining the dispute resolution process within the contract. In reality, this inclusion protects your clients just as much as it protects your company. It formalizes the resolution of any disagreements surrounding the project or contract, increasing the likelihood of a mutually-beneficial solution, decreasing the time and financial cost, and building a stronger relationship with clients.

6.   Termination clause

Even the most robust conflict resolution protocol doesn’t protect your company from all client issues. There may be times when abandoning a project entirely is the right move both financially and reputationally. A termination clause gives you the legal right to end the contract when certain conditions arise. Make sure to go into depth regarding the termination process, potential fees, and the responsibilities of each party.

7.   Force majeure

No matter how much risk mitigation project managers perform, some circumstances are simply out of everyone’s control. That’s where a force majeure clause comes into play. This common provision exempts both parties from liability in the event of an extraordinary occurrence such as a natural disaster, labor stoppage, or material shortage which prohibits the terms of the agreement from being fulfilled. Unlikely? Definitely! But, adding this simple clause can save you significantly if the unlikely happens.

Further Reading: How Can Your Construction Company Handle Riskier Projects

8.   Insurance

Insurance is another crucial component of a comprehensive and optimized construction contract. The agreement should define what types of insurance are required for the project and which forms each client is responsible for obtaining. Generally, construction companies need to have general liability, builder’s risk, and worker’s comp insurance. On the flip side, clients typically should have property insurance. Specifics vary between projects, but all projects should specify insurance demands.

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