Business

What Should Be in a Contractor Agreement?

Whether individually or part of a larger company, the term contractor defines anyone who does construction work on a job-by-job basis. Whether this is you yourself or a contractor, a company looking to hire one, or an individual who needs construction work done, you should protect yourself with a contractor agreement.

Contractor agreements are particularly important since contractors, by definition, are not employees. They often work in a specialized field and, as such, charge more money for their services than they’d receive as a salaried worker. Regardless of what types of construction contracts you partake in, there are some things that should be in every contractor agreement.

Compensation

The compensation clause in a contractor agreement outlines the agreed-upon compensation that the contractor will receive for their work. In some cases, this may extend to travel expenses, provided accommodation, and cost of living, particularly if the paying party is a large company and requires its contractors to be nearby.

However, rarer forms of compensation aside, this mostly refers to monetary payment. In contractor agreements, this payment is calculated in one of four ways, depending on the type of contract it is.

Unit-Pricing

Unit-pricing contracts are the least financially beneficial to the contractor, as they’re conducted with the express knowledge and agreement that the contractor will work at a standard rate without any markup. This means that there won’t be any unexpected expenses for specific materials or tools required for the job, no matter their cost.

The reason contractors will agree to these types of agreements is generally due to them being long projects with large companies where they’re guaranteed a certain amount of work. Often, these rates will be offered as a bid for the job from multiple contractors who wish to take control of the project.

Fixed-Price

These types of contracts are more thoroughly implemented by businesses and individuals alike. A fixed price contract establishes the cost of labor and materials, which won’t be exceeded, unless in the event that specific clauses are met. An example of a clause could be actions taken by the paying party that result in the job taking longer or requiring more work.

Fixed-price contracts favor the paying party as stipulations can be made about the time in which the job must be completed. The final date may be set by which the client expects the contractor to have finished the job, and there may be financial repercussions for overdue work in favor of the paying party.

Labor and Material

A labor and material contract specifies that the contractor will only charge for their working rate, plus the expenses of any tools or materials that need to be purchased for the job. This amount may have clauses stipulating that the client will provide the necessary equipment and thus only pay for the labor cost.

More often than not, these types of contracts don’t have a specified end date, though they may have predictions of when the job will be complete. The rate for labor will be determined either hourly or daily, often with a maximum overall price for the project to prevent the contractor from exploiting the client.

Cost-Plus

Cost-plus contractor agreements share many similarities with labor and material contracts in that the bulk of the payment will be determined by hours or days of work and the cost of materials. The main difference is that while labor and material agreements favor the client, these agreements favor the contractor.

Often there will be a fixed minimum fee that the contractor will be paid regardless of the hours they work. Additionally, contingencies will be in place to protect the contractor in the event that the job takes longer or requires more work due to the actions or negligence of the client.

Consequences

In addition to the compensation and type of agreement, every contractor agreement should outline consequences for either party breaking their contract. Contractor agreements are legally binding to protect both parties against being taken advantage of. Look out for these breach-of-contract clauses to avoid breaking yours and to enforce the other party’s.

When the Contact is Broken by the Client

The client is completely within their rights to decide that they don’t wish for the contracted work to continue; however, the contractor still expects to be paid. A contractor agreement may stipulate that if the client abandons the project before it is complete, all compensation will be paid in full to the contractor for the cost of labor and materials up to that point.

Additionally, cancellation compensation is a common clause in such contracts. As the contractor will expect a certain amount of work when they agree to the job and may have booked other projects around it, there should be a clause guaranteeing a specified amount to be paid to the contractor if the project ends early.

When the Contact is Broken by the Contractor

Anyone paying for a contractor’s work should protect themselves from being taken advantage of. If you’re the one hiring a contractor, ensure there are enforceable clauses to protect you if the contractor pulls out of the agreement early. Examples of this would be that the contractor doesn’t get paid or only gets a percentage of their compensation if the job is left unfinished.

There may also be stipulations that a contractor can leave the agreement without penalty if they provide a suitable contractor to take their place. This is an important clause in protecting both the client and the contractor in the event of a major life event or any other circumstance preventing the contractor from completing the work.

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