Like other contracts, construction contracts also consist of purpose and terms and conditions to achieve that specific purpose. Every contract has its own purpose, which makes it different from other contracts. To illustrate, a lease agreement showcases the intention of parties to lease out the property for a certain period of time. Generally, a contract is a mutual legally binding document between two parties based on conditions, duties of parties, and consideration, etc. recorded in written form.
Importantly, an agreement has no fixed format and parties can set the terms and conditions according to their requirements as well as to better protect their interests. Yet, certain rules of the Indian Contract Act and any other applicable law must not be violated while drafting the contracts.
What is a construction contract?
The construction contract is a legally binding document in writing, in which two parties are involved, one part can be one or more property owners and the second part could be one or more contractors. Under this contract, a property owner is called a client and the contractor is known as a service provider. The motive behind entering into this contract is to construct a particular thing for the client by the service provider.
Why it is important?
The relationship between the client and contractor is delegated in nature; if the client and the contractor do not clear all the points properly including quality, quantity, budget, and time as per requirement then it creates assumptions on some point, which creates ambiguity in the future, hence give rise to the dispute in coming times. The poor quality of the used material in the construction of the building and delay in delivery of the project are the major reasons for disputes between the client and the contractor.
In absence of a proper agreement between the client and the contractor, there are chances that issues may arise between the parties, therefore, to avoid such kinds of situations, it would be better to enter into a well-drafted construction contract so that future hassles may be eliminated.
What are the types of construction contracts?
There are different types of construction contracts according to the suitability of the client and the contractor. The basic difference between these different categories of contracts lies with the mode of paying consideration. Some of the types are elaborated below: –
- Lump sum contracts: – This is a fundamental type of construction contract, under which an amount is fixed for all the completed work. This type of contract is not lengthy and most preferred in small projects.
- Time and materials contracts: – Where the consideration for delivering the project is fixed on the basis of time i.e. per hour or per day and materials used in the project, in such cases, the parties opted to enter into such kind of contract. According to this contract, the contractor has to provide the quotation of materials for attaching the same with the agreement.
- Cost-plus contracts: – The consideration is decided on the basis of the cost incurred on the project and the additional fixed amount as a profit to the constructor. The percentage of such cost is mutually decided by the parties.
- Guaranteed Maximum Price contracts: – Under this category, a maximum limit of cost for construction is fixed, and in case, the limit for the same extends, then the contractor has to bear an extended amount.
- Unit price contracts: – As per this contract, the construction work is divided into different units, and a quotation for such different phases is given by the contractor. The consideration is mainly based on the measurements, and, therefore, these types of contracts are also known as measurement contracts.
What must be a part of the construction contract?
There are a number of significant clauses that must be a part of the construction agreement. The minutiae of these clauses are given below: –
- Scope of work: – This is the key clause of the agreement which describes the work and obligations that are to be carried out by the contractor. Under this clause, the quality and the brand of the products to be used for the constructions must be specified clearly.
- Duration: – The time period for completion of the construction work is mutually decided by the parties. This clause determined the time till when the contractor is supposed to complete the allotted work and obligations. The consequences of not completing the project within a prescribed time must also be a part of this clause.
- Consideration: – Consideration is an amount that is decided to be paid by one party to another party in exchange for rendering services or delivering products. Under the construction contracts, such an amount is paid by the client to the contractor for construction work. This clause contains the fixed amount of the project and the points and factors on which the final consideration can be calculated. Further, the mode of paying the consideration must also be mentioned under this clause like how payment will be paid either to be paid in a lump sum or to be paid in installments.
- Remedy clause: – Under this head, the consequences of breach of an agreement are defined. If any party fails to fulfill its obligations and perform the duties as assigned under the contract, then it creates a breach of contract. In case of a breach, the aggrieved party can exhaust the available legal remedies as specified under the agreement.
- Dispute resolution: – This clause throws light on the mechanism through which the dispute between the parties will be resolved. Basically, arbitration and mediation are the most preferred dispute resolution methods which are being chosen by the parties.
- Jurisdiction and governing law: – This part specifies the place of litigation i.e. where the parties can resolve their dispute and the applicable laws to the agreement.
It is crucial for both i.e. client and contractor to clarify the expectations in terms of quality, quantity, consideration, and time period for delivery of the project, etc. to protect the interest of both sides. Such agreements help parties to fulfill their purpose without affecting each other’s rights. It is always advisable to carefully go through and analyse the agreement to make sure that it caters to your requirements and better protects your side.
Associate at Aggarwals & Associates, S.A.S. Nagar, Mohali