When you begin a job, there will be many things on your mind. What supplies will I need? How long will this project last? How many workers, if any, do I need? One of the most important questions should be: Has my client signed a construction contract yet?
Construction contracts are legally-binding documents that protect you from your client in case they decide not to pay, or claim that you were supposed to complete a task that wasn’t initially agreed upon. It also reassures your client that you will finish the job the way it was agreed upon in the initial deal.
You should consider these factors when drafting a contract:
Contracts should have four basic things: what exactly is being done, price, terms of payment, project dates
There are four things that you should always put in a contract. These are the basics of any binding contract to help protect you from potential disputes during a job:
- Parameters of the job Define what services you are performing for your client. This protects you from a client claiming you were supposed to do something that was not agreed upon.
- Price Define how much you are charging for the job. It can be laid out in a whole sum, an hourly rate, or a percentage fee. If a payment dispute arises, refer your client back to this clause.
- Payment terms Clearly explain how and when you payments should be made, as well as any down payments required by your client.
- Dates Indicate the approximate start and completion dates. Be sure to include stipulations for weather, potential material delays, and change order guidelines. Be sure to give yourself enough time to complete the task. If you feel that a specific end date is unreasonable, state that the job ends when the project is finished.
The project you’re doing will determine the type of contract you should use
A construction contract can usually be broken down into four basic types of agreements that serve specific kinds of jobs. Some are better for short-term jobs, while others are better suited for longer and potentially unpredictable jobs:
- Fixed price contract This is a simple contract where your client pays a fixed price for the entire project. It will typically contain an estimated completion date and an agreed-upon total cost for the work. In this contract, it’s important that you factor in costs for materials, any additional paid crew and subcontractors, and some financial wiggle room to plan for any unexpected costs to make sure you’re making a profit.
- Cost-plus contracts A cost-plus contract can help protect you during projects that may be more unpredictable, or when your client wants the flexibility to make changes during the project. In this type of contract, the client agrees to pay for all of the labor and materials, as well as an agreed-upon amount of profit for you. For instance, if your service fee is 20% of the total cost of the project, that’s what you’ll make on the job. Keep in mind that these kinds of projects usually involve reimbursements, so you may have to front some of the cost of materials initially.
- Time and material contract A time and material contract is similar to a cost-plus contract, but instead of you agreeing to a fixed fee, the client typically pays you an hourly or daily rate for your time as a worker. In this type of deal, the client still takes care of material and labor costs. This is a great contract if your client does not like the idea of a fixed fee for your work. It also protects you from an unpredictable client that wants to keep adding to the job. In this type of deal, the more you work, the more you get paid.
Should you include maximum price guarantees?
In cost-plus and time and material contracts, your client may want to include a maximum price guarantee. This is a clause that states they will not pay more than a certain amount. While this assures the client that they will not break the bank on the project, it also holds you accountable for costs.
If you feel comfortable with the maximum price guarantee, don’t be hesitant to use it ー it can give your customer peace-of-mind. Just make sure you know for sure you can still complete the job and make a profit.
Sign the contract before the job begins
Once the job and cost is agreed upon, you should always sign a contract with your client before starting work. This way, anytime a dispute about services, payment, or dates arise, you can just refer to the details in the contract. Always make sure that you are comfortable with the contract before you sign it. After all, this contract is made to protect you and your business.