A construction contract is a legal agreement created by two or more parties that involves some type of construction project. It is a specific kind of contract. Most commonly, a construction contract is formed between a property owner and a contractor or builder.
A contractor is usually hired to perform a project or complete a service for the property owner. Once the parties agree to a construction contract, each party has legal obligations to do what they promised in the agreement.
There are four main types of construction contracts:
- Lump Sum or Fixed Price: This is a contract for a specific amount of money to complete an entire construction project. Any costs related to the project are part of the price. For example, you agree to pay a contractor $10,000 to remodel your kitchen and the cost of supplies is included.
- Cost Plus: This is a contract where the property owner is responsible for paying the contractor for certain expenses. For example, you agree to pay a contractor to add an addition to your home, but they will bill you separately for certain supplies or labor.
- Time & Materials: This is a contract where an agreement is made for payment to be made daily or hourly. Often the property owner also agrees to pay for certain costs. For example, you agree to pay a contractor $100 per hour to work on a project and reimburse them for any money they have to spend to finish the job.
- Unit Pricing: This type of contract is most often used by government agencies. An agreement is made to pay a specific amount of money for certain construction supplies. For example, the government makes an agreement with a builder that they will supply 100 pipes for a set amount of money each.
In general, construction contracts have three main purposes:
- To list the responsibilities that each party has;
- To determine who is responsible for any possible risk in different situations;
- To make things more certain and allow the parties to plan for the future.
Sometimes, construction contract disputes can occur. This is why it is a good idea to have the agreement put clearly into a written construction contract. One way a dispute can occur is if one of the parties does not follow the agreement. If there is a breach of contract by either party, the other party can file a lawsuit to collect damages.
What is a Breach of Construction Contract?
Breach of contract means that one party did not do what they promised to do in the agreement. A party who breaches a contract can be held legally responsible for damages. Most often, in construction contract cases, damages can include money for the party who suffered a loss or was injured by the breach.
There are four required elements to prove breach of a construction contract:
- A legal construction contract actually exists;
- You performed your responsibilities required in the construction contract;
- The other party did not perform their legal responsibilities stated in the construction contract; and
- You suffered a loss or were injured because the other party breached the contract.
The following situation is an example of construction breach of contract:
- You enter into a contract with a contractor to build you a porch on your home for $5,000. You pay the builder the $5,000. The contractor starts work on the porch but only finishes half then stops all work. The contractor did not perform their responsibilities under the contract even though you paid them the money you owed. The contractor can likely be sued for breach of construction contract.
Before suing for breach of a construction contract, you should collect all important information. You should also read the contract again. Most contracts have a section that says what will happen if a party breaches the contract. Some contracts may even require that you use alternative dispute resolution before you can sue. Alternative dispute resolution is a way of fixing disagreements without going to court. It is often a negotiation type process such as mediation or arbitration.
If you think that the other party has breached the construction contract, you should also let them know. There may be a section in the contract that allows them a period of time to fix the breach.
If you are able to prove the four elements then suing the builder for breach of contract may be an option. To sue for breach of a construction contract, you will have to file a lawsuit with the court. This means you will have to fill out specific paperwork and give it to the court. If you are going to sue a contractor for breach of contract, it is a good idea to hire an attorney. An attorney will know the process to start a lawsuit and can represent you in court to get you the best outcome.
How Are Damages Computed in Construction Contracts?
For breach of construction contracts, damages are calculated in two main ways. Either way of computing damages is valid. A court can decide which method to use depending on the facts of your case. The two methods of calculating damages are:
- Cost to Complete: Under this method, the breaching party must pay the amount required to finish the project in the agreement. A court will use this method when the contractor did not finish the job. This is also called defective or incomplete performance.
- Diminution in Value: Generally this means a lowering in value because of a breach. Under this method, the breaching party must reimburse the other party for any value lost because of the breach. This is usually calculated by subtracting the cost of the completed project or the current property value and the cost in the original contract. For example, you enter into a contract to have a house built. The contractor does not complete the job. You have to hire another contractor to finish building the house. You would be paid the difference between the amount in the original contract and the market value of the finished house. If you did not hire another contractor, the breaching party would pay the difference between the contract amount and the current value of the unfinished house. Courts usually use this method when there has not been substantial performance. This means the breaching party did not perform a large part of their obligation.
Are There Other Types of Recoverable Damages?
There are different types of damages available for breach of contract. You can recover other types of damages for breach of a construction contract.
Some common examples of other recoverable damages include:
- Consequential damages: Consequential damages include things outside of the contract. It generally refers to any losses outside of the contract that were the consequence of the breach. This often includes things such as: lost profits, lost time, lost revenue, etc. It is very common to see language in contracts that says a party cannot get consequential damages. Whether you can recover consequential damages will depend on your situation and the language in your contract.
- Liquidated damages: Liquidated damages are those that are stated in the contract. These damages are used when it is hard to figure out the amount of damages.
- Nominal damages: Nominal damages are a very small award, usually a few dollars. It is used when there has been no monetary loss. However, the court still wants to make the point that the breaching party has done something wrong. It also shows that the party that sued had a legal right.
- Punitive damages: Punitive damages are designed to punish the person who breached the contract. It is a penalty for their behavior. It is used if the breach was done on purpose or their actions were really terrible in some way. Punitive damages are not often used by the court. There has to be an extreme situation.
- Specific Performance: Specific performance means that the breaching party must finish their legal obligations under the contract. This could include finishing a project or providing supplies. Courts do not often use this remedy since the relationship between the parties is already bad. It is most often used when the contract involves something very unique.
Are There Any Limitations to My Recovery of Damages?
There may be limitations to your ability to recover damages for breach of contract. Contract law in your state may have other limitations to recovery of damages. The most common limitations include:
- Foreseeable damages: To be able to recover damages, they must be foreseeable. This means that the party who breaches the contract must have been able to know that the damages were likely. For example, if a contractor decides not to finish a house, it is foreseeable that the homeowner would have to go to another contractor to complete the project.
- Duty to mitigate: The party who suffered loss must not make that loss worse. Generally, you should not take action to increase the amount of damages on purpose. For example, if there is a contract to build a house and the property owner stops paying before it is even halfway done, the contractor cannot finish the house and then ask for damages for building the whole house.
- Certainty: You must be able to show damages with certainty. In other words, it must be something that you can measure or prove. For example, a claim that you suffered emotional distress due to a breach will not likely lead to an award of damages.
How Can an Attorney Help Me?
If you have any construction contract legal issues, it is highly recommended that you contact a contract attorney in your area. There are many benefits to hiring a lawyer for construction contracts. A lawyer can help you recover money damages for a breach of a construction contract.
If you are a contractor and being sued, an attorney can review your case and tell you about any possible defenses. They may be able to help reduce or eliminate any money you might have to pay. A skilled attorney will be able to offer advice on how to best move forward in your specific case. They can also represent you in court if necessary.