Contracts for Construction Projects

Construction laws are the body of laws that govern all aspects of building structures. They encompass everything from the initial bidding process to the negotiation and drafting of construction contracts.

In addition, construction laws apply if there is a dispute between the parties about the agreement.

What Are Construction Contracts?

Construction contracts are agreements between two or more parties to complete a construction project. When entering into a construction contract, both parties must do what they promise to do under the contract’s terms after signing it.

If one of the parties breaches the contract, the non-breaching party may sue for damages. A breach is when someone does not do what they promised under the contract. Damages are funds the breaching party pays to compensate the other party for the loss they suffered because of the breach.

A dispute may arise when a property owner and a contractor enter into a construction contract. This is especially true when a contractor engages in construction fraud.

The terms of the contract typically define the options for resolving a dispute that arises from a construction contract. The contract outlines the duties and obligations of the contractor and the property owner.

In many situations, the construction contract defines the available remedies if one of the parties does not perform as promised.

What Are Some Different Contract Types for Construction Projects?

Numerous different types of contracts are used for construction projects as well as other similar endeavors. The different contract types are based on how the payments are made or calculated, in addition to the motivations behind a contractor’s payments.

Common types of contracts that are used for construction projects, as well as other types of projects, include:

• Unit price contracts: The total purchase price for these contracts is the sum of line items (such as lumber and labor costs) in completing the project. If the cost for individual units changes during the job, the overall price is adjusted to reflect this. Unit price contracts are common for public works or highway projects, which often involve many subcomponents that may be difficult to price upfront.
• Lump sum contracts: Also called a fixed-fee or fixed-price contract, this type of contract allows a contractor to be paid a lump sum for completing the entire project. Instead of being paid for each unit, the buyer and the contractor agree on a set price for the entire project. In many cases, the contractor is not required to provide a breakdown of expenses.
• Cost-plus contracts: These contracts are used when a contractor is paid for the project’s cost plus an additional fee for their services. This additional fee may be a fixed amount or a percentage of the total project cost.
• Incentive contracts: In this type of contract, the contractor is paid extra if they can meet various project goals, such as finishing construction before a deadline.

It is important to note that there are also many other types of contracts, but these are the most commonly used by contractors and engineers.

The laws that govern construction contracts may vary by state.

How Do I Know Which Type of Contract to Use?

The type of contract the parties use depends mainly on their ability to foresee and predict costs, including any potential variations in those costs. Market conditions, such as inflation and supply chain issues, can cause fluctuations in project costs.

For example, if the overall cost of a project is relatively easy to calculate, the parties may choose to use a lump sum or fixed-fee contract. Because they anticipate a few changes in cost during the project, the parties may be comfortable enough to agree on a fixed fee for the whole project.

In contrast, if the parties believe there may be many changes in pricing during the project, they may choose to use a unit-price contract. By choosing this contract, the contractor can make sure they are paid the project’s actual cost.

This helps reduce the risks for both of the parties. An incentive contract may be used to encourage the contractor to perform more quickly or to complete a project at a higher quality standard.

Cost-plus and percentage contracts may be used when unique circumstances must be considered, for example, when a contractor is known for their distinct skill or creativity in their field.

If an individual is unsure of which contract is best for them, it may be helpful to contact a contract lawyer who can advise them on the pros and cons of each type of agreement.

How Are Damages Computed in a Construction Contract?

If a dispute arises, there are many ways to compute damages in a construction contract. Two such ways are cost-to-complete and diminution-in-value. The court will determine which method should be used based on the facts of each specific case and the applicable law.

The cost-to-complete method of calculating damages requires the losing party to pay damages to the other party to replace or complete the project agreed upon. A court typically uses this method when the breaching party’s performance is defective or incomplete.

The diminution-in-value method of calculating damages requires the losing party to pay for the difference in the value between the project in its current state and the project as promised in the contract.

When using the diminution-in-value method, the parties would calculate the market value of the structure as it currently exists and the market value of the structure specified in the contract. The builder would then be required to pay the difference between those two totals.

This method is typically only used when substantial contract performance has occurred. For example, the court might use this method when a home is built in breach of the terms of the contract.

Are There Limitations to the Recovery of Damages?

Yes, some limitations may apply to the recovery of damages in breaches of construction contract cases, which may include:

• Foreseeable damages
• Certainty
• The duty to mitigate

The party that is in breach of the construction contract must be able to foresee that the damages will likely occur reasonably. For example, if a contractor refuses to complete a residence, it would be reasonably foreseeable that the purchaser would be required to live somewhere else until their home is completed.

The contractor may then be held liable for the purchaser’s expenses they incurred due to having to live elsewhere. The amount of damages the plaintiff incurred must be proven with certainty.

For example, the plaintiff claims they suffered emotional distress because their dream home was not completed. While this may be the case, these damages are not measurable with certainty. Because of this, it is unlikely that the court will award this type of compensation.

A non-breaching party must mitigate the losses they incur because of the breach. For example, a builder is constructing a house, and the purchaser cancels the contract before the home is finished. The builder could not turn around and finish the home anyway and then attempt to recover damages.

Although the canceling party is in breach of contract, the builder must minimize the damages as much as possible.

Should I Contact a Lawyer for Assistance With the Different Contract Types?

The different types of construction contracts may present numerous legal challenges to both buyers and contractors. If you have any issues, questions, or concerns related to construction contracts, it is in your best interest to consult a contract lawyer for help drafting and review.

Your lawyer can help ensure that you are entering into the best type of contract for your specific needs. In addition, if a dispute or lawsuit arises over the contract terms, your attorney can represent you in court.