What is a contract? A contract is a written agreement between two or more parties that clearly details the responsibilities and obligations for each party, is legally enforceable and is signed and dated by authorized representatives of each party.
The contracting process consists of the contractor receiving a request for proposal or RFP from the owner. The contractor then prepares a detailed proposal of the work including cost, schedule and other details required by the owner. The parties then negotiate the terms of the agreement. All parties then sign the contract.
What is the main purpose of a contract? The contract is a vehicle to transfer commercial risk from the owner to the contractor. Depending on the amount of risk the contractor is willing to assume will be determined by the type of contract.
The most common types of contracts used are Lump sum, Reimbursable or time and materials, Unit price, cost plus fee and guaranteed maximum contracts. The lump sum agreement assigns the majority of risk to the contractor with the reimbursable contract transferring the least amount of risk.
The basic elements of a contract include Commercial terms, Assurances of performance, Insurance, Indemnity, Changes, Disputes, Damages, Warranties, Termination and Suspension and Force Majeure.
The Commercial terms consist of three major elements. The Scope of Work is the first major element. The main purpose of the scope of work is to clearly describe the boundaries of your project. This will often include technical specifications and engineering documents and plans. The Pricing & Payments is the second element. This element details of how and when the contractor will get paid for work completed. The third element is the schedule. The schedule will clearly communicate the contractors plan for completing the scope of work.
Insurance will address the requirements for the different types of insurance, additional insured requirements, Owner controlled insurance program (OCIP) and safety.
Changes will document how changes are handled. These issues will include Owners Directives, Design Changes, Constructive Changes, Payment for changes, Major Changes and negotiating changes. The process for approving or rejecting changes to the project will be outlined.
Disputes and their resolution will provide for the framework and process for the resolution of any disputes that arise. This section will outline dispute resolution options that are available to all parties involved.
Damages will address issues such as Breach of Contract, failure to perform and Contractor’s Financial exposure. This section will determine how damages are determined with regard to liquidated damages, actual damages and consequential damages.
Warranties will address all warranty issues including the scope, duration and any specific requirements that are agreed upon by all parties involved.
Termination & Suspension will address termination for cause, termination for convenience, suspension and cancellation of the contract.
Other Contract Clauses that may be included are Site Conditions, Use of completed portions of the work, Patent Indemnity, Secrecy & Confidentiality, Owners right to inspect, Independent contractors, assignment, Acceptance & the punch list, Advance & Partial waiver of liens, Final waiver of liens, Audit rights, Severability or validity clauses and Venue & Applicable law.