Understanding Key Terms in Construction Contracts

Michael Tobias
5 Minutes Read
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    Contractors and developers should learn how to create detailed construction contracts, in order to protect themselves and their clients. There are many different contract types, and the some of the most common are lump sum and unit price contracts. However, there are certain basic elements that should be included regardless of the type of contract. 

    Creating a solid contract is among the first steps of a successful project, and learning about the essential components of contracts is very important. Most of them start with a basic list of items that are adapted according to each project, and details are added according to the project’s complexity. The following are some basic elements that should be included in every contract:

    • A contract must offer a product or service, in exchange for compensation.
    • The scope and quality requirements of the product or service must be detailed clearly.
    • Another basic element is the time required to deliver the product or service.

    Make sure your projects meet all contract terms.


    Key Terms in Construction Contracts

    Construction Contract Agreement

    This is a document that sets a date and specifies the parties involved in the project. This agreement is established between the project owner and the main contractor or supplier that provides construction services. Inside the contract agreement is a set of clauses defining the project scope, terms and conditions.

    Schedule or Calendar

    The construction schedule or calendar is the result of distributing all construction activities within a period of time. This item should be described in calendar days or business days, and the schedule may be altered during construction depending on the issues encountered.

    The construction schedule tells the client how and when the project will be completed. Visual representations are always helpful when talking with clients, so make sure to create a Gantt chart or another similar visual aid. This document also serves as a guideline for the contractor to schedule the work.

    Statement of Work

    The statement of work is also referred to as the scope of work. This document describes all the construction activities that will be required to complete the project, which includes: 

    • Who is responsible for certain activities?
    • How will the task be completed?
    • What materials are required?

    Creating a clear scope of work for a project is helpful during the bidding process. However, if the scope cannot be defined clearly, there are certain types of contracts that can be created without a completed scope.

    Terms and Conditions

    This section contains all the responsibilities corresponding to the owner and the contractor. This section includes the legal framework for the overall contract: there are specific terms regarding liens, penalties, arbitration rules, withholdings, procedures for claims, and even resolution of disputes. The most important part of this item is establishing the rights and responsibilities of each party.

    Contract Laws

    This includes all governing laws, liens requirements, arbitration procedures, insurance, claim procedures, liquidated damages, final completion, and substantial completion requirements. This section can also provide procedures to follow when the agreement with the contractor is suspended or terminated beforehand.



    The specifications portion of the contract is where all the technical data and requirements are included. There should be a list of specifications for every construction task, including materials, procedures, techniques, and equipment expected to be used. These specifications are open for negotiation, and should be discussed between the parties while the contract is being developed. Specifications that must be altered or changed are handled under the change order conditions in the scope of work.

    Drawings and Quantities

    There is a document known as the bill of quantities, which includes several lists of materials, costs, labor and trades that will be part of the project. This document is useful when contractors are preparing their bids.

    Another essential element that every contract should include is a set of project drawings and plans. This can be the actual blueprints of the project, as well as simpler drawings that provide a graphic representation of specific details.

    Cost Estimate

    This document provides a breakdown of all items required for project completion, and their costs. The cost estimate can be detailed per item in a format that combines specifications and costs, or it can be given as a lump sum where items are not specified individually.

    Insurance Coverage

    This part is essential, especially for the owner: it provides a guarantee that the contractor is financially capable of performing the work, under the terms and conditions specified in the contract. 

    As mentioned before, there is no such thing as a too detailed contract: some contracts include specifications for security, staffing requirements, excusable events, etc. Every contractor should consider adding documents that improve the clarity and scope of contracts. The goal of a contract is establishing the terms to solve any claims or issues that might arise during the project.


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    Tags : project management construction management construction administration construction contract

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