How the contract works
Construction contracts are designed to protect both the client and the contractor. They establish the work to be completed, the agreed delivery date and the mode of work as well as an evaluation of risk. The contract is an integral part of the project, helping determine its transition from drawing board to building site. Both sides need to agree to what is expected of them and how they plan to meet those demands.
For the client, the construction contract begins with the Contract Selection Process. This is the starting point for the procedure as it deals with choosing the contractor for the contract. When making the decision the client must consider the cost of the project, the length of time it is estimated it will take and the quality of work the contractor produces. Risk is also an important factor. Often there is a requisite for planning for an increase in cost, in say materials, or a capacity for change on the project. The principal procurement methods include general contracting, design and building, construction management and the management of the contract.
What the construction contract should include
For the contractor, the construction contract is in essence an agreement in accepting terms and conditions of cost, timescale and the work to be delivered. Risk, in terms of changing cost in a commercial market is particularly significant for the contractor. The market can change rapidly, for example inflation or a shortage of a specific material can increase its cost. Any delay may impact on the ability to complete the job, and also the ability to be paid.
As well as the timescale and cost, the construction contract needs to specify the assets used as part of the project. This may be the tools and materials used to complete it as well as incorporating any sub-contractors. The contractor can either specify the cost for these at the beginning of the procurement process, or additional contracts can be negotiated if more materials are required and need to be purchased while the contract is ongoing.
In terms of payment, the contract can either determine for the job to be paid in full on its completion or it can be paid in stages as a project milestone is reached. This is known as Percentage of Completion Method Accounting. The contractor estimates the time, cost and revenue of the project in stages from beginning to end. This estimation should be made reliably, if this is not possible then any additional costs incurred during the project can be invoiced on an ad hoc basis.
The construction contract should also define how a project is seen to be completed, what the end goal is. This may be decided by costs or the completion of a physical proportion of the work.