Understanding Construction Contract Terminology
Lisa A. Barton, Esquire, Bazelon Less & Feldman, P.C.
Accurate and effective construction contracting can be critical to the successful
completion of a construction project. Accurate construction contracts and subcontracts will
clearly identify the parties to the agreement, define the scope of work, and establish the parties’
performance and payment obligations. Depending on the nature and size of the project, an
effective construction contract will also include provisions that establish the time for and
conditions of performance and payment, describe the submittals, reviews and approvals required
during the course of performance, and define the procedures and remedies available in the event
of disputes arising under the contract, including a party’s breach or other failure or inability to
complete performance of contract obligations.
Parties seeking to improve the accuracy and effectiveness of their construction contracts
should try to gain an understanding of contract terms, including the minimum terms necessary to
make a contract, as well as terms that have developed special meanings in the construction
industry.
Terms needed to make a contract
In its most basic form, a contract is made when one party accepts the offer of another
party to enter into a bargain. The minimum requirements for a contract to exist are two parties,
who have mutually agreed to exchange something of value. The parties can be a buyer and
seller, or an owner and a contractor, or any other combination of persons or entities who have
agreed to exchange something. The agreed-to exchange – the consideration for the contract –
usually involves the payment of money in exchange for goods and/or services, but an agreement
to barter goods or services is also a contract.
No particular words are needed to make a contract. A contract can be as simple as a onepage purchase order, or even a verbal handshake agreement. As long as the parties have agreed,
in writing or orally, to exchange something of value, a contract has been made.
Terms with special meaning in construction contracts
Some terms have acquired special meaning in the construction industry or when used in
construction contracts. Contracting parties should be aware of industry standard and trade
meanings of these terms, because trade usage may be considered to interpret the contract if the
terms are not clear on their face, and are not otherwise defined in the contract. If the parties
intend a contract term to have a specific meaning, or to have a meaning different from trade
usage, or if a contract term is otherwise ambiguous, the contract should include a definition of
the term as it is used in the contract.
In addition, if a term (such as Owner, Contractor, the Project, the Work, etc.) is used
elsewhere in the contract as “shorthand” to refer to such entities or key provisions, that term
should be defined near the beginning of the contract.
Common terms used in construction contracts, which may or may not be expressly
defined in the contract, include:

Owner. The term “Owner” generally means the owner of the construction
project that is the subject of the contract. The Owner of the Project may not necessarily be the
owner of the real property where the Project is located. For instance, the Project Owner may be
a commercial or residential tenant, with only a leasehold interest. Where the Owner of the
Project is not the owner of the property, the term “Owner” should be defined in the contract to
make this clear, and the construction contract should provide that the Owner of the Project will
obtain and prove the property owner’s consent to the construction included in the contract before
construction starts.

Contractor. The term “Contractor” is generally understood to mean the
person or entity that contracts to perform the work included in the construction contract. The
Contractor may perform the work using its own forces, or using subcontractors, or through a
combination of both. Unless the contract provides otherwise, the Contractor has sole control
over construction means and methods; i.e., how the work is done, the tools and equipment that
are used, and the order in which the work is done. If the project involves multiple contractors
(for instance, a public contract with multiple primes, or a project constructed in phases, or a
project in which various components, such as site work, general construction, and interiors, are
the subject of separate contracts with the owner), the term “Contractor” should be defined in the
contract to identify the particular person or entity who contracted to do the Work under the
particular contract.

Subcontractor. The term “Subcontractor” generally means a person or
entity who contracts directly with the Contractor to perform a portion of the Work in the
construction contract.

Work. The term “the Work” is generally understood to represent the
scope of work included under the particular construction contract. The contract should include a
narrative description briefly summarizing what is included in the Work. For instance, on a
single-family residential project, the Work might be defined as “construction of a new woodframe slab on grade two-story residence and two-car garage;” on a commercial interior project,
the Work might be defined as “construction of new dental care facility, with lab space and
examination rooms in existing medical office building;” on a renovation project, “conversion of
an existing five story masonry warehouse to rental apartments,” on a limited-scope project,
“furnishing and installing a new HVAC system in an existing three-story nursing home facility.”
Unless the contract expressly provides otherwise, the Work under a construction contract is
usually understood to include the labor, materials, equipment and services needed to complete
the Contractor’s obligations under the contract.

Project. The term “the Project” usually refers to the construction or
development the Owner seeks to complete, by means of this and possibly additional construction
contracts. The Work under a particular contract might consist of the construction of the entire
Project, or the Work might be only one part of a larger Project, so the terms “the Work” and “the
Project” are not always interchangeable. For instance, an electrical contractor’s contract (or
subcontract) may designate the electrical work as the Work, which is only one component of the
construction of an entire building. The combined Work of several different Contractors – for
instance the electrical, mechanical, structural, plumbing, and general contracting Work necessary
to construct the entire building – would in that instance constitute the Project.

Architect/Engineer/Design Professional. The terms “the Architect,”
“the Engineer,” “the Design Professional,” or similar designations, refer to the licensed design
professional who furnished the construction documents for the Project. Some construction
contracts, including the AIA form contracts, provide that the architect is the Owner’s
representative on the Project, with authority to review the Work, reject nonconforming work,
review and approve submittals and payment applications, issue certificates of substantial
completion and final completion, and initially decide disputes between the Owner and the
Contractor under the construction contract. However, the architect will only have these
responsibilities if the contract provisions give them to the architect; in other contracts, some or
all of these responsibilities may be assigned to a construction manager, or may be retained by the
Owner.

Contract Documents. The term “Contract Documents” usually includes
the construction drawings and the specifications, but can also include other documents listed in
the construction contract as part of the Contract Documents. The contract for a complex Project
should specifically identify the Contract Documents applicable to the contract, by sheet number,
drawing title, and date (for drawings), title, date and volume (for specifications), and should
provide similarly specific descriptions of any other documents that form part of the Contract
Documents.

Cost of the Work. This term is generally understood to mean the cost of
the Work included in the particular construction contract, including the contractor’s general
conditions, overhead and profit. The Cost of the Work does not include the Owner’s separate
financial obligations relating to the Work, such as design fees, costs of the land, or bank
financing charges, or the cost of the Owner’s other contracts on the Project.

Retainage. The term “Retainage” refers to the percentage of the payment
otherwise due from the Owner to a Contractor (or from the Contractor to a Subcontractor), that is
withheld until the Work has reached Final Completion and all mechanics’ liens are released or
have expired. The purpose of Retainage is protecting the Owner, by giving the Contractor an
incentive to complete the Work, including any punch-list work, and by allowing the Owner to
hold onto funds that could be used to pay someone else to complete the Work if the Contractor
fails to do so.

Substantial Completion. The term “Substantial Completion” is generally
understood to mean completion of the Project sufficient to allow occupancy or use. A Project
that has reached Substantial Completion may still have some finish work or punch list work
remaining to be completed.

Final Completion. The term “Final Completion” means the completion
of all the Work under the contract, including punch list work, and furnishing any other materials,
lien waivers, manuals, warranties, or other documentation required by the contract.