How to Create a General Contractor Agreement

A general contractor agreement is a legally binding contract between a property owner (or developer) and a general contractor that governs the construction, renovation, or improvement of real property. This agreement establishes the scope of work, payment terms, timelines, insurance requirements, and the rights and obligations of both parties throughout the project. Whether you are building a new home, renovating a commercial space, or managing a large-scale development, a comprehensive contractor agreement protects your investment and provides a clear framework for resolving disputes that arise during the construction process.

Why You Need a General Contractor Agreement

Construction projects involve significant financial commitments, complex logistics, and multiple parties working in coordination. Without a detailed written agreement, property owners risk cost overruns, schedule delays, substandard workmanship, and disputes that can escalate into costly litigation or mechanic's lien claims against the property. A well-drafted contractor agreement allocates risks appropriately, sets clear expectations, and provides mechanisms for addressing problems before they become legal disputes.

Every state regulates the construction industry through licensing requirements, building codes, lien statutes, and consumer protection laws. The contractor agreement must comply with these state-specific requirements to be enforceable. In many states, contracts with unlicensed contractors are void and unenforceable, and the contractor may forfeit the right to payment for work performed.

Defining the Scope of Work

The scope of work is the foundation of the entire agreement. It describes in detail what the contractor is expected to build, install, renovate, or repair. A vague or incomplete scope of work is the most common source of construction disputes because it allows each party to interpret the contractor's obligations differently.

How to Write an Effective Scope of Work

The scope of work should reference detailed plans, drawings, specifications, and any applicable building codes or standards. List each phase or component of the project separately, including site preparation, foundation work, framing, electrical, plumbing, HVAC, roofing, interior finishes, landscaping, and final cleanup. For renovation projects, specify what will be demolished, what will be preserved, and what materials will be used for new construction.

Include a clear statement of what is excluded from the scope of work. This is equally important because it prevents the contractor from being held responsible for work that was never intended to be part of the project. Common exclusions include hazardous material abatement, utility connections beyond the property line, furniture and appliances, and any work requiring specialized trades not within the general contractor's scope.

Payment Terms

Payment is typically the most negotiated section of a contractor agreement. The payment structure should align with the project's complexity, duration, and risk profile. Three primary payment models are used in construction contracts.

Fixed Price (Lump Sum)

Under a fixed-price contract, the contractor agrees to complete the entire scope of work for a predetermined total price. The contractor bears the risk of cost overruns, while the owner benefits from budget certainty. Fixed-price contracts work best when the scope of work is well-defined and unlikely to change significantly. The total price should be broken down into a detailed schedule of values showing the cost allocation for each component of the work, which serves as the basis for progress payments.

Cost-Plus

In a cost-plus contract, the owner pays the contractor for the actual cost of labor, materials, and equipment, plus an agreed-upon markup or fee that represents the contractor's profit and overhead. The markup is typically expressed as a percentage of costs, ranging from 10 to 20 percent depending on the project size and market conditions. Cost-plus contracts provide transparency and flexibility but shift the risk of cost overruns to the owner. To protect the owner, include a guaranteed maximum price (GMP) cap that sets an upper limit on total project costs.

Time and Materials

Time-and-materials contracts pay the contractor based on hourly labor rates and the actual cost of materials used, plus a markup. This structure is appropriate for projects where the scope is uncertain or evolving, such as emergency repairs or exploratory renovation work. Specify the hourly rates for each trade, the markup on materials, and the maximum number of hours authorized without additional approval.

Regardless of the payment model, establish a clear payment schedule tied to project milestones or monthly progress. Retainage, which is a percentage of each payment withheld until project completion, is standard in the construction industry. Retainage rates typically range from 5 to 10 percent and are released upon substantial completion and resolution of all punch list items.

Change Order Procedures

No construction project proceeds exactly as planned. Change orders are written modifications to the original contract that adjust the scope of work, contract price, or project schedule. The agreement must establish a formal change order process to prevent unauthorized work and cost disputes.

Require all change orders to be documented in writing and signed by both the owner and contractor before the changed work begins. Each change order should describe the additional or deleted work, the cost impact including labor, materials, and markup, and any schedule adjustment. Establish a markup rate for change order work, which is often higher than the base contract markup to account for the disruption to the planned workflow. Include a provision allowing the owner to direct the contractor to proceed with changed work pending agreement on price, with the cost to be determined after the fact based on actual time and materials.

Timeline and Milestones

Specify the project start date, substantial completion date, and final completion date. Define what constitutes substantial completion, which is generally the point at which the work is sufficiently complete for the owner to occupy or use the property for its intended purpose, even if minor punch list items remain.

Create a detailed construction schedule with milestones for each major phase of the work. The schedule should account for permitting timelines, material lead times, weather contingencies, and coordination between trades. Include provisions for schedule extensions due to force majeure events, owner-caused delays, and changes in the scope of work. Consider including liquidated damages provisions that impose a daily charge on the contractor for delays beyond the completion date that are within the contractor's control. Courts generally enforce liquidated damages clauses when the daily rate represents a reasonable estimate of the owner's actual damages from the delay.

Insurance Requirements

Insurance is a critical component of any construction contract. The agreement should specify the minimum insurance coverage the contractor must maintain throughout the project.

General Liability Insurance

The contractor must carry commercial general liability (CGL) insurance with minimum coverage limits, typically $1 million per occurrence and $2 million aggregate. CGL insurance covers bodily injury, property damage, and personal injury claims arising from the contractor's operations. Require the contractor to name the property owner as an additional insured on the CGL policy.

Workers' Compensation Insurance

Every state except Texas requires employers to carry workers' compensation insurance. The contractor must provide a certificate of insurance confirming active workers' compensation coverage for all employees. This protects the owner from liability if a worker is injured on the job site, as workers' compensation provides the exclusive remedy for workplace injuries in most states.

Additional Coverage

Depending on the project, additional insurance requirements may include automobile liability insurance for contractor vehicles used on the project, builder's risk insurance covering the structure under construction against fire, theft, and weather damage, umbrella or excess liability insurance providing additional coverage above the primary policy limits, and professional liability insurance if the contractor provides design services.

Licensing Requirements

Contractor licensing requirements vary significantly by state. Some states, such as California, require all contractors to hold a license issued by the Contractors State License Board (CSLB) for any project valued at $500 or more. Other states regulate licensing at the county or municipal level. The agreement should require the contractor to maintain all necessary licenses and permits throughout the project and to provide proof of current licensure upon request.

Verify the contractor's license status before signing the agreement. In most states, a contract with an unlicensed contractor is void and unenforceable, meaning the contractor cannot sue to recover payment and the owner may be entitled to a refund of amounts already paid. Some states also impose criminal penalties on unlicensed contracting.

Lien Waivers and Mechanic's Lien Rights

Mechanic's lien laws exist in every state to protect contractors, subcontractors, and material suppliers who contribute labor or materials to the improvement of real property. A mechanic's lien gives the unpaid party a security interest in the property itself, which can be foreclosed upon through legal proceedings.

To protect the property owner from lien claims, the agreement should require the contractor to provide lien waivers with each payment application. Lien waivers are documents in which the contractor and all subcontractors release their lien rights for the amount being paid. Use conditional lien waivers for progress payments, which become effective only when the payment is actually received, and unconditional lien waivers for final payment. Many states have statutory lien waiver forms that must be used to be effective. California, for example, prescribes specific lien waiver forms under Civil Code Sections 8132 through 8138.

Warranty Provisions

The contractor should warrant that all work will be performed in a good and workmanlike manner, in accordance with the contract documents, applicable building codes, and industry standards. A standard warranty period for general construction work is one year from substantial completion, during which the contractor is obligated to repair or replace any defective work or materials at no cost to the owner.

Distinguish between the contractor's workmanship warranty and manufacturer warranties on equipment, fixtures, and materials. The agreement should require the contractor to assign all manufacturer warranties to the owner and to cooperate in processing warranty claims. Some items, such as roofing systems, HVAC equipment, and structural components, carry manufacturer warranties that extend well beyond the general one-year construction warranty.

Dispute Resolution

Construction disputes are common and can be expensive to litigate. The agreement should establish a multi-step dispute resolution process designed to resolve disagreements efficiently. A typical approach includes an initial requirement for direct negotiation between the parties, followed by mediation before a qualified construction mediator, and then binding arbitration under the rules of the American Arbitration Association (AAA) Construction Industry Arbitration Rules or, alternatively, litigation in a specified court.

Arbitration is generally faster and less expensive than litigation for construction disputes, and arbitrators with construction expertise can evaluate technical claims more effectively than a jury. However, arbitration decisions are final and offer very limited grounds for appeal, so both parties should carefully consider whether to include a mandatory arbitration clause.

Permits and Code Compliance

The agreement should clearly assign responsibility for obtaining building permits and ensuring compliance with all applicable building codes, zoning ordinances, and local regulations. In most cases, the general contractor assumes responsibility for pulling permits and scheduling inspections, as the contractor is more familiar with the permitting process and has established relationships with local building departments.

Include a provision requiring the contractor to correct any work that fails to pass inspection at the contractor's sole expense. The contractor should also be responsible for scheduling and coordinating all required inspections and for promptly notifying the owner of any code violations or compliance issues.

Subcontractor Management

General contractors typically hire subcontractors for specialized trades such as electrical, plumbing, HVAC, roofing, and concrete work. The agreement should address the contractor's authority to engage subcontractors, the owner's right to approve or reject proposed subcontractors, and the contractor's responsibility for the performance and payment of all subcontractors.

Require the contractor to include flow-down provisions in all subcontracts that bind subcontractors to the same terms and conditions as the prime contract, including insurance requirements, lien waiver obligations, and warranty provisions. The contractor should be fully responsible for all work performed by subcontractors and for resolving any disputes between subcontractors and the owner.

Using an online document generator like Forms Legal allows you to create a customized general contractor agreement that addresses all these essential provisions while complying with your state's licensing, lien, and construction laws.