Contracts
What is a “Contract”?
A contract is defined as a set of promises. In order to be enforceable, all contracts must contain the following elements:¨ There must be an agreement between the parties, “a meeting of the minds” on the subject matter of the contract.
“The subject matter must be lawful.”
“There must be sufficient consideration.”
“All parties must have the legal capacity to contract and there must be compliance with legal requirements regarding the form of contract. A construction contract must be in writing to be enforceable.”
A construction contract is divided into five sections:
- The parties to the contract – each party to the contract is listed.
- The scope of work – the entire scope of work must be listed in this section. On major projects, a separate book with the written scope of work and the accompanying blue prints will be included as an attachment detailing the scope of work and will be listed as an exhibit to the contract.
- The cost – This section should include the cost of the work specified in the contract, as well as how progress payments are to be calculated.
- The Terms and Conditions – Spells out how the project will be administered. Detailed explanations should be spelled out.
- The signature page – It is not a valid contract if all parties do not sign it.
What type of Contract should be used?
There are three types of contracts typically used in the renovation or construction of PraiseBuildings. They are “Fixed-Fee”, “Cost-Plus”, and “Not-to-Exceed”. There are benefits and negatives to each of these. When it comes time to hire the contractor, consult with legal counsel as to the form of contract for your project and the specific language to use.
The AIA (American Institute of Architects) publishes many standard contracts to be used on projects where the owner has retained an architect. These contracts, while very good and thorough, do tend to favor the architect. One finds on many larger projects some form of an AIA contract will be used. As with the scope of work, spell out in as much detail as possible the terms and conditions. It is prudent to consult an attorney as to the type and language to be used in the construction contract.
Preparing Contract Documents
Before a project can be put out for bid, contract documents must be prepared. These typically include the blueprints and specification manual, working drawings and a standard contract form such as the AIA Standard Form of Agreement. The standard contract forms outline the basic requirements of the project. These include duties of the contractor, duties of the owner, duties of the Project Manager, the beginning and completion dates, the contract price, the manner of payment, and the conditions under which change work orders will be executed.
Contract Price
The contract price can be figured as a fixed fee (a stipulated sum) or it can be figured on a time and materials basis (cost of work plus a fee) usually with a “not-to-exceed” price written into the contract. Each method has its advantages. Stipulated sum contractors are preferable when the scope of work is well defined, and there is little likelihood that any unknown conditions will be encountered during the construction process. For example, in a re-painting the sanctuary, most contractors will find it relatively easy to estimate the cost of patch plastering and painting on the square foot area of the wall surface and the cost of the labor to apply the paint.
The contractor’s standard contingency fee should cover any unexpected conditions encountered during the course of construction. If the building conditions are unknown, such as with structural issues, and the full scope of work can to be established until the work begins, a time and materials contract with a “not to exceed price” should be considered. First it gives the contractor the flexibility to deal with unexpected problems without having to renegotiate the contract price, provided the work falls within the scope of the specifications.
The owner is protected from going over budget by the “not to exceed” price while the contractor’s profits are protected from a “runaway” scope of work since he or she is billing on a time and materials basis. This sort of an arrangement helps enlist the contractor as an ally rather than a potential adversary in the construction process because the contractor’s profit margin is not affected by dealing with unknown or unexpected conditions.
The two types of contracts can also be combined, with some portions of the scope of work billed on a time and material basis within a stipulated sum contract. This arrangement can be used when most of the planned work is clear-cut and easily budget, but some portion of the scope of work has too many unknown conditions to accurately budget.
By Stephen Ferrandi, Director, KLNB Regious Properties
Stephen Ferrandi is the Director of KLNB Religious Properties, a real estate firm serving religious clients in Maryland, D.C., Pennsylvania, and Virginia. He is one of the top experts in land development in the region. Mr. Ferrandi frequently contributes real estate related articles to both print and online publications.