Getting started. The person who wants to undertake a construction project has three choices. He can do it himself; he can contract with various suppliers, such as plumbers and carpenters; or he can hire a general contractor, who subcontracts the work to various suppliers. The larger the project, the more likely it is that a general contractor will be used.
Probably the most common method for finding a general contractor is asking for recommendations from other businesses that have undertaken similar construction projects. Many businesses will get the names of at least two or three general contractors and ask them to submit bids or cost estimates. A business, however, is under no obligation to take bids on the work and is free to award the work to a friend or family member.
Typically, the bidding process begins with the business developing construction specifications that define the project's scope and set out the business's expectations. The specs are then given to the general contractors, who produce bids.
The business is under no obligation to accept the lowest bid. A business, for example, may choose a higher bid because it believes that the higher bidder will deliver a superior quality of work. Other factors that may come into play include concerns about a bidder's financial stability or lack of experience on similar projects.
Where the government undertakes a construction project, special rules apply to ensure that public funds are not wasted. The rules require the government to follow strict guidelines for making sure that the bidding process is fair and competitive. Whether it actually is or not is a separate discussion, but the rules are designed to make sure that government officials are playing fair with public money. Awarding contracts to political cronies or family members is a time-honored political tradition.
The applicable law in Illinois is called the Illinois Purchasing Act, which sets minimum standards for bidders to ensure that they are qualified to perform the work and prevents the government from drawing up specs that limit the bidding to a single bidder.
The contract. Once a bid is accepted, the next step is to draw up a contract. The typical construction contract is fairly complex. As a result, both the business owner and the contractor should seek help from an attorney with experience in construction contracts. If either party produces a standard contract for the other to sign, have it reviewed by an attorney.
One important contractual provision is how the contractor is to be paid. The most common approach is to pay the contractor periodically, once completion goals are met. For example, the contract might provide payment upon completion of one-fourth of the work, one-half, three-fourths, and all of the work. The contract would define what constitutes each of those milestones.
What constitutes completion of the project is often a source of contention. When can the contractor declare that he is finished? To what extent can the business owner withhold final payment until all of his concerns are addressed? The term commonly used is substantial performance, which means that the contractor is entitled to final payment even if the business owner believes that minor defects remain. If the owner is forced to pay someone else to fix the defects, the cost of those repairs can usually be deducted from what is owed the contractor. Contractors should be wary of any provision that defines completion of the project in subjective terms, such as "upon the business owner's satisfaction."
Another payment approach is called cost-plus, which means that the contractor would be paid for his costs, plus an agreed-upon percentage as profit. The downside of this approach, from the owner's viewpoint, is the uncertainty of what the costs will be.
A third approach is unit price, which pays the contractor upon completion of certain units required under the contract. An example is the contractor who is building townhouses. The contract might provide payment upon completion of each townhouse or a series of townhouses.
A construction project where the business owner knows from the beginning exactly what he wants and never changes his desires or his instructions to the contractor is rare. Project changes during construction are common. The changes, of course, don't always emanate from the business owner. The contractor may have unforeseen difficulty in obtaining supplies or a subcontractor may be unexpectedly unavailable.
A good construction contract will address what happens if changes occur. Typically, if the business owner changes his mind about what he wants or adds something not part of the original specs, the owner will bear the cost of the change. Contractors should be careful in defining the scope of the project, which in turn defines when a change occurs. The scope should be drawn as narrowly as possible.
Generally, construction contracts cannot be modified unless both parties agree to the modification. The modification doesn't normally need to be writing, but it does need to meet all the requirements of forming a contract - offer, acceptance, and consideration - because it is treated as a new contract.
A related issue is what to do if the project changes due to reasons neither party considered. Suppose, for example, that a nesting ground for a protected species or a buried container of hazardous materials is discovered on the property. A well-drawn contract should address what happens if a changed condition is discovered.
Construction delays also need to be addressed in the contract. To what extent can a business owner declare that the contract is breached if the project is delayed? Generally, construction delays do not constitute a breach of the contract, unless the contractor has walked off the job and has said that doesn't intend to return. The remedy in most construction contracts is a provision entitling the business owner to money damages from the contractor for delays. Some contracts also provide incentive bonuses to contractors who finish project stages ahead of schedule.
Mechanic's liens. If the business owner fails to pay the contractor for services rendered, the contractor's remedy is a mechanic's lien. A mechanic's lien is available to statutorily defined lienors, such as contractors and subcontractors, who meet all the statutory requirements for filing a lien, including substantial performance of the contract.
Liens are filed with the county property records and give notice to others that a debt is owed to the contractor. The property cannot be sold or money borrowed against it without the lien being first satisfied.
Bonds. A federal law, called the Miller Act, requires any contractor doing business with the federal government to supply surety bonds, which would pay the government in the event the contractor failed to live up to his obligations under the contract. Bonds are also commonly used in private construction work.
Illinois has enacted the Public Construction Bond Act, which requires a bond from a contractor on all public works. It also provides that a county or municipality may not require a cash completion bond where the contractor has filed a current, irrevocable letter of credit of at least 110% of the amount of the bid.
Liability. Workers injured while working on a construction project are generally covered under workers' compensation laws. Workers' compensation insurance is usually purchased by the contractor, as a condition required by the owner, to cover everyone working on the project. The contractors, in turn, usually require the subcontractor to purchase workers' compensation coverage for their own employees.
Independent contractors, who by definition are not anyone's employee, are usually not covered under workers' compensation laws. If they are injured while working on a project, their recourse is tort law, which means that they would have to establish negligence or strict liability (inherently dangerous condition) on the part of the owner, contractor, or subcontractor in order to recover.
Contractors, and any subcontractors working for the contractor, may be liable to the owner for construction defects, for which they usually purchase insurance. If a project involves architects, engineers, or other design professionals, they may have liability to the owner for design defects. They too typically purchase professional liability insurance to protect themselves against such claims.
In addition to workers' compensation insurance, most construction contracts require the contractor to purchase general liability insurance, which covers bodily injury not covered by workers' compensation and property damage.