Individual construction projects can generate tens of thousands of dollars or more in revenue for construction companies. Excitement about the opportunity represented by a project can sometimes prompt business leaders to rush forward without thoroughly protecting the organization with appropriate contracts.
It is also somewhat common for successful construction firms to use fill-in-the-blank contract templates that may not adequately protect the organization in the event of a dispute. Each contract needs to thoroughly explain each party’s expectations and must align with California state laws.
Drafting thorough contracts that protect a company’s interests and adhere to all relevant California statutes is of the utmost importance for the future success of that company. What should California construction contracts include?
State law generally requires written contracts
There are unique laws that apply to construction projects and business contracts in California. Any projects involving a combined cost of $500 or more in materials and labor are subject to regulations enforced by the Contractors State Licensing Board (CSLB). These projects require CSLB-licensed professionals and written contracts.
The initial contract and any subcontract related to it should include the relevant CSLB license number. The contract needs to explain the work required and the materials the client wants the contractor or company to use.
There should be clear terms regarding payment arrangements. State rules limit down payments to the lesser of $1,000 or 10% of the total project price. The contract should describe the schedule for paying the remaining amount due.
The contract may also need to include rules for disputes and for change orders. If the discovery of latent defects, a supply chain disruption or a labor shortage result in a change to the proposed budget, timeline or scope of the project, the change order required to modify the agreement should be in writing.
Construction firms may also want to include indemnification clauses that limit their exposure, penalties for late payments and clauses requiring that any disputes go through mediation before litigation. Thorough and enforceable contracts help protect the business itself and ensure compliance with industry regulations.
Working with construction law attorneys familiar with the creation and review of project contracts can minimize the risk inherent in accepting new work. Thorough contracts clarify company obligations and help limit liability should anything go wrong during a project.