Construction Corner: Construction Contract Basics

In a previous Construction Corner Post we discussed the primary elements of a design contract for a school construction project. In this post we will describe the basic elements of a construction contract for a school construction project where the constructor is a general contractor.

The basic business terms of a construction contract include:

  • Scope of the Work – what is the contractor building?
  • Schedule for the Work – when will the work be completed?
  • Compensation to be paid for the Work – how much will the contractor be paid?

Scope of the Work
The Scope of the Work is principally defined by the plans, drawings and specifications prepared by the project architect.  These documents, often referred to as the “construction documents”, are incorporated into the contract by reference.  The construction documents should be sufficiently detailed and complete to provide the contractor with a “road map” to the completion of the project. Complete and comprehensive construction documents will lead to more reliable bid prices and a more successful project outcome.  Because a state assisted public school project is not to go out to bid until the construction documents have been reviewed and approved by the Department of Administrative Services, the construction documents for these projects are relatively complete when the request for proposals is issued (published).  For public school projects that are not state assisted and private school projects, scheduling issues can drive a decision to bid a project before the construction documents are as complete.  It should be noted that there may be a “price to pay” for bidding a project prematurely as contractors will likely include a sum in their bid price to protect them against the uncertainties associated with the further development of the  construction documents. If construction commences prior to the completion of the construction documents, change order requests should be anticipated and it may become increasingly difficult for the project to be completed within the initial project budget.

Schedule for the Work
School projects are often particularly time sensitive in that they must be completed during summer recess. As a result, the completion of the Work according to an established schedule is critical.  The contract generally includes a date for the commencement of the Work, a time frame for “substantial completion” of the project and provides that final completion be achieved within a certain number of days after substantial completion.

Although the construction schedule may take different forms, a common form is referred to as a critical path method schedule (“CPM Schedule”).  Simply put, a CPM Schedule includes all elements of the work required to complete the project, the time that each element of the work will take to complete, the dependencies between the various elements and the dates for milestones and deliverables.  Logically, a delay in the performance of one element of the work on the critical path will have an impact on the timing of various other elements.  An updated CPM Schedule incorporating the delay will illustrate that impact.  Whatever the form of schedule selected, the contract should clearly describe the scheduling requirements along with the obligations of the contractor for timely reporting of anticipated delays and schedule changes.  Given the time sensitivity of school projects and the costs associated with delay, a liquidated damages provision for the assessment of liquidated damages against the contractor for failing to complete the project on schedule is frequently included in school construction contracts.  This provision will give the contractor an additional incentive to timely perform. Please note that a properly drafted liquidated damages provision is essential to its enforceability against the contractor.

Compensation
The contract price for a general contractor is most commonly based on a lump sum amount.  The contract should set out the amount of the lump sum, the basis for payment, the schedule for payment and the requirements for payment.  Most commonly, payments are invoiced and paid monthly based on the percentage of completion of the work.  The contract should require that the contractor submit a schedule of values which allocates the entire lump sum amount to the value associated with all of the elements of the work. The schedule of values is thereafter used as the basis for determining the percentage of completion of the work and the amount payable to the contractor.  A stated percentage of each monthly payment is generally held back from each monthly payment (which is referred to as “retainage”) for the protection of the owner.  Connecticut statutes provide limitations on the amount of retainage that may be withheld in public and private projects.

For state assisted school construction projects, the form of construction contract to be used for the project should be included as part of the bid package.  The request for proposals (RFP) should specify that the selected contractor will be expected to enter into a contract in a form substantially similar to that included in the bid package.  The RFP should instruct bidders to include any objections they have to the terms and conditions of the form contract in their bid proposal but the RFP should clearly reserve the right of the owner to modify the contract in its discretion.

In our next Construction Corner Post, we will discuss the procurement of a General Contractor.