A Handy Guide to Mastering Construction Terminology


There are no easy tasks in the construction industry. Construction is convoluted and at best complicated even before a shovel is in the ground. This post walks you through the construction terms that will safeguard your business. It will give you confidence to build your company on a solid financial foundation.

Construction terms don't get many excited but they are necessary as you navigate the construction industry.

Not having this knowledge could cost you time and money - neither of which we want to lose. 

Without further ado here are 12 construction terms that will guide your decisions as you build your company.

Accounting Terms

Accurate and reliable financial statements position you for success.

Take time to understand your company's financials, you don't need to know every detail but be comfortable with the numbers.

Get familiar with these basic terms. 

  1. Schedule of Values - a detail of work items on a project, it includes a description of the work and the value of the work. The schedule of values totals to an amount that equals the contract amount and forms the basis of the application for payment.
  2. Application for Payment - this document specifies how contractors are paid. They are broken down by labor and material based on the Schedule of Values. The application for payment is typically produced once per month, based on contract terms. Simply put - this is how a contractor gets paid.
  3. Cost Codes - each invoice and subcontractor application for payment is tracked with a cost code. Coding job costs allows for detailed financial record keeping, especially important when determining the total cost of a particular job. The ability to keep accurate job cost records will make or break your ability to succeed.

“You cannot manage what you cannot measure.”

Peter Drucker

Contract Terms

Contract law is the one area everyone needs a partner.

Pay a professional to review your contracts and subcontracts - it will payoff in the log run!

For now, here are a couple terms you should understand.

  1. Waiver of Subrogation - a provision included in contracts to prevent an insurance company, that has paid for a loss, from suing another party involved with the project that may have caused the loss. The end result is that the risk of loss is not passed on to anyone else and stays with the insurance company.
  2. Indemnification - with an indemnity clause, one party to a contract agrees to assume responsibility for certain liability resulting from third-party claims against the other party to the contract.
  3. Liquidated Damages - an agreement to forgo potential disputes about actual damages in the event of a breach of contract and instead stipulates, in advance, a reasonable estimate of probable damages. In it's simplest form, liquidated damages are expressed in $x,xxx per day if the duration of the project exceeds the contractual schedule.

Construction Contracts can be a tangled mess. A lawyer with construction experience can help you navigate the balancing act of contract negotiation. The cost of a lawyer on the front end will no doubt save you on the back end.

construction terms

Bonding Terms

A surety bond protects against the interruption of a construction project.

Your financial health is important to your surety company as they are extending faith that you can complete the project. (Remember the Accounting Terms excerpt above!!)

  1. Bid Bond - a bond required for the competitive bid process. The owner of the project will dictate bid bond requirements for the bid submission. This acts as a pre-qualification to assure the owner that the contractor is capable of performing the work.
  2. Performance Bond - a bond that protects the owner from financial loss if the contractor's work is defective and not in accordance with the terms of the contract.
  3. Payment Bond - a bond which guarantees the chosen contractor has the financial means to compensate their workers, subcontractors and suppliers.

Insurance Terms

Insurance can be a rabbit hole but any insurance agent worth his / her weight can walk you through the products you need. AssuredPartners out of Charleston, SC has served the clients I've worked for and provide incredible service as they go to bat on your behalf. 

Because without insurance you will have no work!!

Here are a couple points to consider when building your insurance program.

  1. Builder's Risk Insurance - this insurance covers property, equipment and supplies at the job site. It pays to replace or repair covered property in case of theft, a fire, etc during the duration of the construction project. The owner contract will specify who purchases builder's risk insurance - the owner or general contractor.
  2. General Liability - this insurance protects against claims made by others for property damage or bodily injury. Keep in mind that the General Liability policy does not cover the cost of repairing defective work; it only covers the damage which results from said defective work.
  3. Additional Insured - a method to shift the risk from an upper tier contractor down to the lower tier. Most contracts require a lower tier sub to add an upper tier as an additional insured to their liability policy. This means that if the upper tier sub is sued for something that involves the lower tier's work the upper tier can lean on, and force, the lower tier sub's insurance company to pay for defense.

Conclusion

It's crucial for you to have the expertise to plan and construct projects, that's a given. However, it's just as important to understand the financial / contractual side of your construction business. Use the information on the construction terms above to navigate the back end of your construction business!

If this seems overwhelming to you, do not hesitate in reaching out for guidance. Rely on professionals, yes they come at an added cost, but quality professionals will provide value that far outweighs their fee.

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