All You Need to Know About Construction Agreement

This article is written by Manav Sony from Amity University, Kolkata. The article talks about construction contracts and also other aspects involved in it. It also specifies about successful negotiations and also how the contracts will be made after the Covid-19 situation. 

Introduction:

A Construction Agreement is a type of a document that mentions the date and also the information about the parties who are going to be a part of the entire construction process. This agreement is made between the owner of the construction company and the supplier or merchant who will be providing materials and services to the company. The agreement also states the Terms & Conditions, Scope, requested services and all such important clauses that are actually important. In this Agreement, the owner has the full rights in order to decide the nature of the agreement and also legal terms and conditions which have to be there in order to make it strong and also appealing. This agreement is really very important because it specifically mentions the roles, responsibilities, risks, entire budget of the project and also rights of both owner and contractor. A construction contract can be made by anyone irrespective of his/her position as a record for keeping all the details and also taking strict action if by chance there is violation of any provision mentioned in it. 

An effective Construction Agreement should be written in a very clean and also precise legal language should be used so that it becomes easy to read without any sort of confusion. It is always recommended that you should consult a well-known Professional who has an idea on how to frame a well written agreement. These Agreements are really important because it specifies all the important things involved in a construction project. Also, a construction agreement should be flexible enough in order to avoid scraping off the entire thing and begin everything from the scratch. Before making the agreement, have a good knowledge of the Construction Laws so that you can mention all those if needed. One thing which should be kept in mind is that there should not be any sort of typing error or mistakes. Each and every procedure should be followed properly as per rules and regulations. 

Why is there a need for a construction contract?

We all know the need for a Construction Contract. It is really important for the parties to know about the economic transactions which are going to take place and also about the obligations of parties to each other and also the risks whether it will be shared or divided in the project. The contract mentions all the terms and conditions which has to be followed by both the parties and by chance if there is any violation of any clause, then the appropriate party can take immediate action against the other party immediately. Once both the parties sign the contract, the project commences thereafter. A construction contract has a lot of value. If incase any compensation amount is mentioned for any sort of loss happened, then the affected party can immediately file for a case in the court of law and recover it hereby.  Also, it is always recommended to have a written Contract and not Non-Written. A written one can be used as a record and a future evidence whenever the need arises. There are various complexities in the non-written contract because it does not mention the agreement clauses properly and also the court may not consider it properly. One of the biggest problems is that the mindset of party’schanges in terms of the clauses during any sort of dispute. A contract provides the entire roadmap of the project, how it is going to function, and an onset on how the parties will work in the entire project. Before starting any work, it is really important to know about the procedure which has to be followed. It is highly recommended to both the parties to read the entire contract carefully before signing it. This will ensure smoother function of the work and reduces the possibility of risks. Without a proper contract, the parties will try to assume their own style of work and assumptions are not at all safe. Both the parties may have their own set of assumptions which might lead to a big failure of the project. Therefore, it is highly recommended to have a mutual settlement among each other and then sign the contract if agreed. A construction project will only be successful if you make a clear chart of the work. The contract will make both the parties bound to follow only those methods, rules, regulations etc. that are mentioned. Contracts will make the parties stick to one action plan which will not even lead to a huge confusion between them. 

Legally essential elements:

It is really important to have some important elements mentioned in the contract which are legal in nature. The elements which are legally essential are as follows: -

1. Full Name, Address and Signatures of the Parties:

The first important element which is needed in a contract of construction is to mention the names of the parties involved in the project, their addresses, and also their signature which serves as a proof that they have agreed to all the terms and conditions mentioned in the contract clearly. We all know that these things are common, but the important aspect of this information is to get a track of the parties in the court of law incase of any dispute. 

2. Scope of the Project Operations:

This is also one of the important elements in a contract. Still, the parties do not pay any heed to it and work as per their wish. A construction contract should clearly mention the services, materials to be used, schedule of work, grade of the product and all other essential things involved under the entire project which has to be followed by both the parties. 

3. Cost of the project and mode of payment:

This element should be taken care of properly and the amount should also be mentioned correctly after a joint agreement from both the sides. There should not at all be any sort of confusion involved in terms of the cost of the entire project along with some other costs involved in it. First, there should be a mutual settlement made between the two parties and then only it should be specified in the contract. Also, the due date, mode of payment and all other sorts of information in terms of payment must be nicely mentioned in the contract so as to have a proper flexibility.

4. Work schedule:

A construction contract must state the date of joining, work hours, number of leaves allowed, and completion date of the project so that it becomes easier for all to follow and work as per it. One clause should be mentioned in the contract is that the parties should not be held responsible for any sort of delay in the operations due to any natural calamity or any unavoidable circumstance. The parties should also inform the suppliers about any sort of changes required in the purchase of any material and it should also be rectified in the contract beforehand. Setting up a work schedule will help everyone to abide by it. 

5. Authority:

In order to avoid any sort of panic or tensions, it is recommended to mention the person who will be given the full right to take legal or any other sort of decisions before initiating the project and also during the entire project duration. It will save a lot of time and also reduce burden. If so, many people take their own decisions in the project, then the project will never be successful. 

Does a person need to have a construction contract with their builder?

If you are planning to build your own home as per your choice, it is really very important to have a construction contract with your builder. It must specify all the details, duration and all other necessary details in order to keep a proper track. A person should make a contract with his/her builder because it helps you to look into the work accordingly and in case if there is any problem, it can be resolved easily. Before signing the contract, check all the terms mentioned in it and negotiate with the builder if there is any change required. Once you are satisfied with everything, then only sign the contract. The contract gives a clear picture of the works and services which has to be performed. Everyone dreams of having their own house and they even dream about the way and style they want their house to be. Many times, we see that the builders have contracts ready and it is filled with so tough words, that it gets really very tough to understand it properly. If any problem arises, it is recommended to hire a lawyer or an agent for this process. Such a person will help you in giving proper consultancy about the contract which will definitely become easy to follow. In order to protect and safeguard your rights, the language of the contract should be simple and easy to understand. One more important aspect that is required over here is that all the important terms should be mentioned in the contract regarding the scope of work, work timings and all other things because it is really necessary to get the work done in a smoother manner.

Types of construction contract:

There are around 8 Various Types of Construction Contracts which are defined as follows: -

1. Lump Sum Contract:

A lump sum or stipulated sum contract is a type of contract in which only a single price is fixed for the entire construction project and through which the owner gets a complete idea about the project at once. This type of contract requires deep planning with proper step by step procedures which needs to be followed on an urgent basis. This contract mentions all the costs, including the profits and all other nominal costs involved. The payment is made under the basis of percentage of work done. The flexibility of this contract is really very minimum and the changes or alterations required in the design pattern is done through an order which is paid by the owner itself. 

2. Commercial Contract:

A commercial contract is a type of contract which is made in order to keep a record of the works which has to be done for a construction of either a residential or non- residential building. The contract mentions all the important terms regarding the operations that have to be followed in a correct and orderly way. This contract is really important because it reduces risk, protects your interests and also raises that chance of profits.

3. Domestic Construction Contracts:

A Domestic Contract is a type of contract in which important information is recorded about the works and services regarding the construction of a residential or non-residential building within a particular country and not outside that country.

4. Percentage Rate Contracts:

A Percentage Rate Contract is a type of contract which is made in a situation when there is not a single possibility of any unbalanced type of tender. It is made on the basis of two factors i.e. lowest rate and a comparative position among the contractors of a contract.

5. Cost plus fixed Contracts:

A Cost-Plus Contract is a type of contract in which the negotiation regarding the costs, additional fees and also the profit is done between both the parties. The owner is the main controller in this contract. But the risks incurred are transferred directly to the owner. In this contract, the owner pays the cost-plus fees to the contractor and all other fees as per mentioned accordingly. This type of contract is really beneficial for the contractor because it provides a great flexibility and also it is less risky for them because of the fact that the owner incurs all the risks involved.

6. Cost plus percentage of cost contract:

A cost-plus percentage of cost contract is a type of contract in which the owner pays the full costs of the project to the contractor along with some percent of extra cost as a profit mentioned in the contract. The owner pays more than 100 percent of the documented cost. Contractor has to keep a record regarding all the costs of labour and material costs and the contractor should be paid accordingly.

7. Subcontract Agreement:

Subcontract Agreement is a type of contract which is made between a builder and subcontractor. The main purpose of this contract is to negotiate about the specialist work which has to be done at a construction project. 

8. Unit Cost Contract:

A Unit Cost Contract is a type of contract which is made in order to record the units incurred instead of the single price involved at the entire project. In this contract, the specific rate for each item is calculated by using several other dimensions as per involved. Also, this type of contract is made when it is really very difficult to check the quantity of the work performed. 

Impact of successful contract negotiations:

The most important aspect in a construction contract is a proper negotiation between owner and builder. There are certain aspects which have to be negotiated properly in order to have a proper and smooth functioning of work. These are some of the points that justify the point that how a successful contract negotiation plays a huge impact: -

1. Through a successful negotiation, the two parties can fix the proper price of the project and also the mode of payment in which the payment has to be made.

2. Another main impact of a successful negotiation is to decide the proper scope of work and also to ensure proper accuracy and clarity in the functioning of the entire project.

3. A successful contract negotiation helps in scheduling and fixing of the operations which will take place. A proper result will only come if a schedule is fixed and all the workers follow it accordingly.

4. A successful contract negotiation will also help in allocating the risk between both the parties. The two parties may decide on the clauses that involve risk and therefore allocate accordingly.

In the end it is always recommended that in order to have a successful negotiation of the contract, an attorney or legal representative must be hired who can guide both the parties about the terms and conditions of the contract and thus a proper negotiation can take place without any sort of confusion.

Issues and challenges:

A Construction Contract is a really very beneficial type of contract for the parties involved in the construction project. It helps in recording all the information and also creates a bond of trust between them. But there are certain issues and challenges that the parties face in this contract which is really tough to solve. These are common issues and there might be a possibility that the parties may face it. The issues and challenges involved in a construction contract are given as follows: -

1. The first issue which the parties face is regarding the work scope. The operations sometimes are not carried properly which may cause a lot of problems ahead. If the workers do not perform nicely, then the project will never get completed on time and with perfection. 

2. The second issue which the parties face is regarding the payments. If the owner does not make the payment to the builder time to time, then the work will not be continued properly and thus it will lead to disputes between them. Payments should be made on time whenever promised.

3. The third issue involved in this case is assumptions. The builder tries to make assumptions about the materials purchased by him and tries to recover that amount only. Sometimes, the builder does not follow the contract and thus tries to recover cost according to his/her choice.

4. The fourth issue involved is regarding the project change. Many times the owners try making changes in the project and also, change orders are not mentioned in the contract on the basis of which the owners have to pay an amount and then make the changes in the document accordingly. If a change order is not given, then it will lead to continuous changes in the project plan.

5. The fifth issue is about Delays. The builder may sometimes try making so many delays that it leads to the completion of the entire project quite late. Delays are the main problem which happens during the project.

6. The final issue in the contract is about the fact that the builder or contractor does not specify about the third party involved in the contract. Such a mistake leads to a dispute in the court of law by the third party in order to recover the cost of the damages. 

The dotted line: contracts post-pandemic:

Coronavirus pandemic has shaken the entire world. The pandemic has infected around crores of people and has killed lakhs of people. It has even caused huge losses in many industries. The Nation Economy has fallen down to a huge extent. Talking about the Construction Industry, coronavirus has definitely caused a bigger impact. The country is under a lockdown since 24th March,2020. The commercial activities have stopped drastically which has led to huge losses. Due to some restrictions by the Government, the construction activities were also halted for quite a long time. Now we are slowly unlocking the lockdown. Which means that slowly the construction activities are going to commence soon. 

Talking about the contracts post covid-19, there are certain aspects which have to be paid a lot of attention. The first factor which should be checked is regarding the claims for costs and payments. Many parties will try to recover costs of their services because post covid the monetary situation of the people will be really slow. The second factor is regarding scheduling of operations and work routine. Till we do not have a vaccine, we need to maintain social distancing and have a limited staff at the construction site. The contract should clearly specify regarding the scheduling of workers and allot them tasks accordingly. Also, the most important aspect involved over here is about proper coordination and cooperation. We hope that this pandemic gets over soon and we get back to our normal lives soon.

Conclusion:

It is very important for us to always inform the builder or contractor about our needs before giving out any work. It will help us in order to prevent any dispute in future. Although, sometimes people prefer to do all types of agreement verbally, however it is always preferred that a proper written contract should be made as mentioned earlier. Also, while making such contracts, we should keep a close watch on it and make sure that all the provisions mentioned under it caters to our needs. This will also help us to ensure that certain unforeseen events can be avoided in future. We should always consult our legal professional whom we trust completely before making such contracts.