Contracts are for lawyers, or at least they should be. General Contractors, subcontractors, and just about everyone else involved in the construction industry is faced with more and more contracts every year. The more familiar you can be with how they work, the better. In it’s the most basic form, an enforceable contract includes the scope of work to be performed and gives instructions on how payment will work. In this article, we will break down the key elements that make an enforceable contract for a construction project.
The four elements of Contract formation
Contract formation requires four elements:
- Intention to be bound.
In other words, you have something and someone else wants to buy it. You agree to a price, money is exchanged, and voila, you have a contract. Some contracts, typically those based in property, require contracts to be written. Make sure what is required in your jurisdiction. Some legal terms may have special meaning in the context of contracts and knowing them may help you get a better deal.
Consideration is one of these terms. In essence, it requires an exchange between the parties, whether that is an exchange of goods, materials, services or good old-fashioned money. To form a contract, you need to give something of value (time, energy, resources, etc.) to a project and the project must pay you in return, in some way. Without this exchange, a contract is not likely to be enforceable (unless you’re in Louisiana).
Detailing the scope of work
Detailing the scope of work is one of the most important aspects of a construction contract. Special challenges exist regarding what happens if the project changes after the contract are signed, but provisions can be written to cover just about any imaginable change order.
how and when payment will become due and payable
In addition to an ‘as detailed as possible scope’ of work, every contract should discuss how and when payment will become due and payable. For contract purposes, it’s always important to explain who will determine when work is completed for a stage or the entire project. This is also your chance to state clearly who the responsible party is.
Is it illegal or impossible?
In addition to things that must be included in the contract, there are two things that a contract cannot be: illegal or impossible. For public policy reasons, courts would never enforce a contract that was illegal in nature (e.g., a hitman hired to kill someone). And the impossibility of performance has seen more than one contract ruled unenforceable.
States and localities have different rules for things like lien waivers. Other minor differences exist between the jurisdictions, so always check to make sure that you’re in compliance with all contractual rules. Don’t forget, most jurisdictions require transactions in construction and real estate to be in writing. Other form requirements may exist.
The arbitration clause
For some contracts, the inclusion of an arbitration clause is a good idea. That may allow for cheaper and faster resolution of any disputes down the line. Some contracts include a clause confirming the parties had their legal team review the agreement. Other clauses may be appropriate for your specific contracts.
NEVER SIGN WHAT YOU DON’T MEAN (OR UNDERSTAND)
As simple as a contract appears, remember that you’re making promises whenever you sign or agree to one. Sometimes, we see so many contracts across our desks that we barely read them. This is a mistake. Whether there is ill intent or not, mistakes can be made, and we can agree to things we don’t want. Make sure that you understand everything in every contract, and if you don’t, take the time to figure it out. A lawyer may help if things get too complicated.
Why do we sign contracts at the end? Why are we are asked to write our initials on every page? For centuries, a person’s mark or signature represented their intent to be bound to the contract. Before you sign anything, take the time to read and understand it. Your signature will be proof enough of what you really intended to do, and in contracts, you are generally bound by the terms of the document. In other words, you can’t later try to ‘explain’ any problems in a contract away. The words of the document control.
EXCHANGE OF VALUE FOR CONSIDERATION
The most basic contract is formed by offer, acceptance, consideration, and an intention to be bound. Once there, if you describe the scope of work and the terms of payment, you likely have an enforceable contract. Of course, even these most basic contract elements may be complicated to prepare and if you have any questions, you should contact a lawyer for formal legal advice.