1.3 Construction Contract Law and Types of Contracts

Elements of an Enforceable Contract

A valid construction contract requires offer, acceptance, consideration, legal capacity, and a lawful purpose. This editorial section emphasizes that a contract by an unlicensed contractor may be void or unenforceable, barring the contractor from suing to collect — even for work performed. Under most states' adoption of the Statute of Frauds, contracts that cannot be performed within one year, and most real-property improvements, should be in writing to be enforceable.

Contract Pricing Types

In a lump-sum contract the contractor absorbs overruns, so accurate takeoff and contingency are vital. In cost-plus, the owner reimburses actual cost plus a fee, shifting risk to the owner.

Guaranteed Maximum Price Worked Example

Under cost-plus with a Guaranteed Maximum Price (GMP), the owner pays actual cost plus fee but never more than the cap; savings below the cap may be split.

Example: GMP = $1,000,000. Actual cost + fee finishes at $940,000, a $60,000 underrun. With a 75/25 owner/contractor savings clause, the owner keeps $45,000 and the contractor earns a $15,000 bonus. If actual cost hit $1,060,000, the contractor eats the $60,000 overage — the cap protects the owner.

Markup Versus Margin — The Classic Numeric Trap

This editorial practice section compares the difference between markup (added to cost) and margin (percent of selling price). They are NOT the same.

• Markup: Price = Cost x (1 + markup). Cost $80,000 at 25% markup = $100,000.
• Margin: Price = Cost / (1 - margin). Cost $80,000 at 25% margin = $106,667.

To achieve a 25% gross margin you must apply roughly a 33.3% markup, because markup% = margin% / (1 - margin%). Mixing these up underprices the job.

Changes, Allowances, and Time

A change order is a written, signed modification adjusting scope, price, and time — verbal change directions are a recurring payment dispute. An allowance sets a budget placeholder for an undecided selection (e.g., a $5,000 fixture allowance); overruns are reconciled by change order. Liquidated damages are a per-day amount (e.g., $500/day) set in advance for late completion; they must be a reasonable estimate of harm, not a penalty, or a court may void them.

Key Contract Clauses and Documents

Know the contract documents hierarchy: agreement, general and supplementary conditions, drawings, specifications, and addenda. When documents conflict, written specifications generally govern over drawings unless the contract states otherwise. Watch for:

• Retainage: owner withholds a percentage (commonly 5-10%) of each payment until completion.
• Indemnification (hold-harmless): shifts liability between parties.
• Pay-if-paid vs. pay-when-paid: the former makes owner payment a condition of paying subs; the latter merely sets timing.

Breach, Damages, and Excused Delay

When a party fails to perform, the non-breaching party may recover actual (compensatory) damages and, if specified, liquidated damages. Consequential damages (lost profits, lost use) are often waived by a mutual clause in standard forms. This guide distinguishes excusable delays: a force majeure event (weather beyond normal, strikes, acts of God) typically grants a time extension but no extra money, while an owner-caused delay can support both time and delay damages. A substantial completion milestone starts warranty periods, even if punch-list items remain.

Pricing Structures and Risk Allocation

Memorize who carries the risk in each pricing model. A lump-sum (fixed-price) contract puts cost-overrun risk on the contractor — best when scope is well defined. Cost-plus (cost plus a fee) shifts risk to the owner; a GMP (guaranteed maximum price) caps the owner's exposure and often shares savings. Unit-price suits work of uncertain quantity (earthwork, paving) — paid per measured unit. Time-and-materials (T&M) bills labor at marked-up rates plus materials, used for small or undefined repair work.

Essential Elements and Breach Remedies

A valid contract needs offer, acceptance, consideration, capacity, and legal purpose. The Statute of Frauds requires certain construction agreements (and those over a state dollar threshold or longer than a year) to be in writing. On breach, remedies include compensatory damages, liquidated damages (a pre-agreed daily amount for late completion — enforceable only if a reasonable estimate of actual loss, not a penalty), and specific performance. A substantial completion finding lets the owner occupy and starts warranty/retainage release even with a punch list outstanding.

Editorial Practice Checks

• Trap: Liquidated damages of an excessive amount are enforceable. No — if they function as a penalty, courts void them.
• Trap: Cost-plus protects the owner from overruns. It does not unless converted to a GMP.
• Trap: An oral change order is always binding. Many contracts require written change orders; oral directives risk non-payment.
• Trap: Confusing substantial completion (usable, punch list remains) with final completion (all work and closeout done).

Retainage and Notice Provisions

Two recurring contract clauses round out this section. Retainage is a percentage (commonly 5–10%) withheld from each progress payment until substantial or final completion, protecting the owner against incomplete work. Notice provisions require the contractor to give written notice of delays or claims within a set number of days — miss the window and the claim may be waived. Read these clauses as risk-allocation tools in the local contract-administration practice.