10 Key Questions about Construction Contracts in the US

April 3rd 2024

The year 2024 marks a period of significant evolution in US construction contracts, fundamentally reshaping the industry. This dynamic environment necessitates a thorough understanding of the intricate legal framework governing these agreements. Whether a seasoned professional or a newcomer to the field, possessing a clear grasp of regulations and contracts is paramount for navigating the complexities of construction with confidence.

This article will explore ten key questions that provide valuable insights into the landscape of US construction contracts.

This Article Covers:

What are the key players in a construction project in the US?

The key players involved in a construction project in the US include the owner, construction manager, general contractor, design professionals, subcontractors, and suppliers. 

  • Owner: The individual or entity financing the project and setting the project’s requirements and direction.
  • Construction Manager: Provides advice to the owner on various project aspects such as financing, design, construction, scheduling, and budgeting. There are two types – agency construction manager and construction manager at risk.
  • Design Professionals: Architects or engineers responsible for the project’s design work, providing plans and specifications.
  • General Contractor: Oversees and supervises the construction work, often hiring subcontractors to carry out the tasks.
  • Subcontractors: Hired by the general contractor to perform specific trades like electrical, mechanical, or plumbing work.
  • Suppliers: Deliver materials and equipment to the project site, but do not perform the actual construction work.

What are the various types of construction contracts in the US?

In the US, various construction contracts are used, and their prevalence has been influenced by changes in statutory regulations over time. 

  • Fixed-Price Design-Bid-Build Contracts: Traditionally favored in the industry, fixed-price design-bid-build contracts offer a straightforward separation of the design and construction phases. This approach allows for a competitive bidding process among contractors, ensuring that the project is awarded to the most qualified and cost-effective bidder.
  • Design-Build Contracts: In recent decades, design-build contracts have been gaining popularity due to their integration of the design and construction phases under one entity. This integration promotes collaboration and efficiency throughout the project, as the design and construction teams work together seamlessly to deliver the final product.
  • Engineer-Procure-Construct (EPC) Contracts: A variation of design-build contracts, EPC contracts are commonly employed in large-scale projects such as infrastructure development. By combining engineering, procurement, and construction services into a single contract, EPC contracts streamline the process and enhance coordination among the various project elements.
  • Design Assist Contracting: Increasingly utilized in specialty trades, design assist contracting allows subcontractors to lend their expertise during the design phase of a project. This involvement enhances coordination and reduces conflicts during the construction phase, as subcontractors can provide valuable input from the early stages of the project.
  • Public-Private Partnerships (P3): Gaining traction in infrastructure projects, public-private partnerships involve collaboration between government entities and private sector partners. This collaborative approach shares risks and responsibilities between the public and private sectors, leveraging the strengths of both to deliver successful projects for the benefit of the community.
  • Integrated Project Delivery (IPD): Increasingly adopted in complex projects, integrated project delivery emphasizes collaboration and shared goals among all project stakeholders. By involving key players from the early stages of a project, IPD enhances communication and efficiency, leading to better outcomes and a more cohesive project delivery process.

What standard contract forms are commonly used in the US?

In the US, there is no universal consensus on standard contract forms; the standard contract forms commonly used in the construction industry include:

  • Federal Acquisition Regulation (FAR): Followed in US federal projects to regulate the acquisition process, the Federal Acquisition Regulation ensures consistency and uniformity in contracting procedures for federal agencies.
  • A-201 General Conditions from AIA: Commonly used in projects at the local government or private level, the A-201 General Conditions from American Institute of Architects (AIA) provides a framework for the relationship between the owner and the contractor, covering aspects like payment, disputes, and project delays.
  • ConsensusDocs: ConsensusDocs offers a library of contract documents that aim to fairly allocate risks and responsibilities among project stakeholders. It focuses on collaboration and reducing conflicts during the construction process.
  • Engineers Joint Contract Documents Committee (EJCDC): The EJCDC develops and updates standard contract documents for use in construction projects, emphasizing clarity and fairness in contractual relationships between parties involved.
  • Design-Build Institute of America (DBIA): The DBIA provides contract documents specifically tailored for design-build projects, aiming to streamline the design-build process by integrating design and construction services under one contract.

When using standardized contract forms for complex projects, parties should consider customization, legal review, fairness, clarity, and effective communication to maintain a balance between all involved parties.

What are federal labor laws for construction workers in the US?

In the US, employment relationships within the construction industry are governed by various requirements, especially when it comes to the use of union labor. The National Labor Relations Act (NLRA) of 1935 plays a crucial role in regulating collective bargaining between unions and employers. The NLRA is overseen by the National Labor Relations Board (NLRB), which handles labor disputes, investigates unfair practices, and enforces compliance with the law.

Apart from the NLRA, the Fair Labor Standards Act (FLSA) sets minimum wage, overtime pay, and youth employment protections, typically covering non-exempt construction workers. State wage laws, such as Maryland’s Wage and Hour law, further regulate minimum wage requirements and provide avenues for employees to address violations.

Additionally, the Davis-Bacon Act mandates prevailing wages for workers on federal construction projects exceeding $2,000. This Act requires contractors and subcontractors to pay workers according to wage rates established by the Secretary of Labor.

What environmental regulations apply to construction projects in the US?

Construction projects involving clearing, grading, excavation, or demolition must adhere to federal environmental regulations, including specific sections of the Clean Water Act when dredging or discharging fill material into waterways or wetlands. Compliance with the Clean Air Act is necessary for heavy-duty trucks used in construction to regulate dust emissions at the site. Additionally, regulations govern the use of hazardous materials and mandate reporting of any hazardous chemical spills.

The US Department of Environmental Protection (US EPA) oversees most environmental requirements for US construction projects. While the US EPA delegates authority to states for certain aspects of the Clean Air Act and other regulatory programs, non-compliance can lead to civil penalties or even criminal liability. It is crucial for construction projects to strictly follow these regulations to ensure environmental protection and avoid potential legal consequences.

What are the health and safety standards for construction sites in the US?

The Federal Occupational Safety and Health Act requires employers to provide safe workplaces, enforced by OSHA, with regulations specific to construction activities. States like Maryland have their own safety laws, such as the Maryland Occupational Safety and Health (MOSH) Act, with penalties for non-compliance. Many states have similar regulations, necessitating employer compliance to avoid penalties.

What are the common ways to finance construction projects in the US?

Projects are typically financed through various means depending on whether they are private or public. Private projects often rely on bank loans, where the owner or developer secures financing to carry out the project. Public funds can also be used in some cases, such as through low-income housing credits or tax credits provided by state and local governments.

On the other hand, public projects are financed using state or federal funds. These funds are crucial for state or federal agencies to carry out construction work, and they are usually sourced from tax revenues or special bonds issued for the specific project. Additionally, public-private partnerships (P3s) have become popular for major projects, where the government partners with a private entity to finance and construct the project. The private entity then operates the asset and generates revenue, such as through toll lanes on highways.

Contracts serve as the foundation of any business or legal arrangement, outlining the terms and conditions agreed upon by all parties. Some key elements of a legal contract include:

  • Offer, Acceptance, and Consideration: For a contract to be legally binding, it needs essential components like offer, acceptance, and consideration: 
    • An offer is the initial proposal from one party to another.
    • Acceptance occurs when the other party agrees to the offer’s terms.
    • Consideration involves the exchange of something valuable and demonstrates that both parties are giving and receiving something of worth, whether it is a service, goods, or other benefits. Even a nominal amount of consideration can validate a contract.
  • Statutes of Frauds: Some states require certain types of contracts, such as those involving real estate or agreements that cannot be performed within one year, to be in writing to be enforceable, known as “statutes of frauds.” These laws aim to prevent fraudulent claims and misunderstandings by requiring written evidence of the agreement.
  • Meeting of the Minds: The concept of a “meeting of the minds” is fundamental in contract law. If parties do not agree on essential terms, such as price or scope of work, a binding contract is unlikely to be established. Despite the absence of a written agreement, contractors may still have equitable rights to payment under certain circumstances.

What types of construction insurance are required in the US?

In the US, contractors usually need insurance coverage to safeguard against risks such as property damage, injuries, equipment transportation, and subcontractor issues. State laws often dictate that contractors must be licensed and maintain particular insurance levels. Some common types of insurance include:

  • Builders risk insurance: Protects buildings under construction from damages.
  • General liability insurance: Covers bodily injuries, property damage, and advertising claims.
  • Errors & omissions/professional liability insurance: Protects against claims of errors or omissions in business activities.
  • Inland marine insurance: Covers materials, tools, and equipment in transit.
  • Commercial auto insurance: Protects company-owned vehicles and equipment.
  • Workers’ compensation insurance: Provides benefits for work-related accidents or illnesses.
  • Pollution liability insurance: Covers bodily injury and property damage from hazardous materials.
  • Subcontractor default insurance: Protects against subcontractors failing to perform.
  • Wrap insurance (OCIP/CCIP): Provides liability coverage for entire construction projects.

What types of contractor performance security are available in the US?

In the US, the primary forms of security employed by employers to ensure contractor performance are surety bonds. These bonds typically encompass both payment and performance obligations. Payment bonds guarantee that subcontractors and suppliers are paid for their services, while performance bonds ensure that the contractor fulfills the terms of the contract. They have specific timeframes for filing claims and often expire upon project completion or at the end of the warranty period. The costs associated with obtaining these bonds are typically factored into the contract price and are ultimately borne by the owner.

Another common security measure used is a parent company guarantee, where the parent company pledges to fulfill the contractor’s obligations promptly. This guarantee provides additional reassurance to the owner that any issues with the contractor’s work will be rectified without delay. Unlike surety bonds, the liability of the parent company runs parallel to that of the contractor throughout the contract term. This means that claims can be made against the parent company within the statute of limitations unless otherwise stipulated in the contract agreement.

Important Cautionary Note

When making this guide we have tried to make it accurate but we do not give any guarantee that the information provided is correct or up-to-date. We therefore strongly advise you to seek advice from qualified professionals before acting on any information provided in this guide. We do not accept any liability for any damages or risks incurred for the use of this guide.