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Daywork Contracts in Construction: Guide for Contractors and Owner-Developers
Last Updated Mar 25, 2024
A daywork contract is a construction agreement in which the client pays the contractor for all material and labour costs on a project, as well as the contractor markup.
Unlike lump sum contracts, a daywork contract reflects the actual time spent and materials used on a project rather than a fixed fee. Owner-developers and contractors often use this type of construction agreement when the scope of work, or the project duration, is uncertain — or when changes are likely to occur during the project. For projects with high uncertainty, daywork contracts provide greater flexibility and transparency, both for owner-developers and contractors.
Read on to find out how daywork contracts work, as well as their advantages and disadvantages for contractors and owner-developers.
Learn more: 5 Types of Construction Contracts
Contents
Table of contents
How daywork contracts work
Under a daywork contract, an owner-developer reimburses a contractor for the materials they use and the hours they bill on a project, along with the agreed markup. As a result, the tender that the contractor submits includes the schedule of rates (which includes labour, materials, and any subcontractor rates) plus the agreed mark up.
It is worth noting that daywork contracts do not equate to an unlimited budget for a project. While these contracts do reflect the time and materials that a contractor uses in a project, the owner-developer and contractor still establish a project estimate, one that reflects the known scope of work at the start of the project.
Sometimes, a daywork contract may include a maximum limit (a ‘not-to-exceed’ clause) on the amount that the owner-developer will pay for the project. This clause helps limit the owner-developer’s financial liability. It also provides clarity on the overall project cost, and it serves as a guideline for the contractor to follow when managing the project financials. This ensures that the contractor completes the project according to the owner-developer’s specific budget.
| Cost Category | Description |
|---|---|
| Materials | Materials costs associated with the construction project are covered, including the actual cost of materials (including freight), taxes and a specified markup — typically between 10 per cent and 30 per cent. |
| Labour | Labour costs associated with the construction project are covered. Usually defined as a fixed hourly or daily rate, also called loaded labour rate, which includes base wages, overhead, indirect costs and a profit markup. |
Owner-developers and head contractors typically use a daywork contract when the project’s scope of work is not well defined, or when the project duration is unknown. They may also use this contract type to account for unique project parameters and goals.
After reviewing the known scope of work, the contractor will:
- Determine loaded labour rates, which include wages, overhead and administrative costs and profit markup.
- Identify and price the necessary materials for the project, including freight as well as the contractor’s markup.
- Provide an estimate of the necessary labour hours and materials to complete the work.
Contractors often choose daywork contracts as they are easy to negotiate, minimising financial risk. With a daywork contract, the contractor has the certainty that the owner-developer will reimburse them for their costs throughout the entire duration of the project. If project conditions are adjusted or the scope of work changes, the contractor can consult the owner-developer to update the total project cost estimate.
Benefits of daywork contracts
Daywork contracts offer the following advantages for both owner-developers and contractors.
For Owner-Developers
| Benefit | Description |
|---|---|
| Simplicity | Once the labour and material rates are agreed upon, work can often begin quickly, as contractors are less exposed to financial risk than they are with many other contract types. |
| Flexibility | Owner-developers can often adjust the scope and direction of the project as it progresses without having to renegotiate the entire contract. |
| Transparency | Throughout the project, the contractor provides the owner with detailed information about the costs of the work, enabling the owner to monitor the project's budget and progress. |
| Tender Review | The simple pricing structure — just labour rates and material costs — allows owner-developers to easily compare tenders. |
For Contractors
| Benefit | Description |
|---|---|
| Straightforward compensation | With a daywork contract, the contractor is compensated for all work performed and all costs incurred, including any unforeseen or additional work required to complete the project, resulting in greater financial security. |
| Decreased burden before construction | Preconstruction efforts are minimal, reducing the effort required by the contractor prior to construction. |
| Opportunity to build long-term relationships | The transparency required in a daywork contract can enable contractors to establish a solid relationship with the owner-developer that potentially results in future opportunities. |
| Profitability | If markup rates are correctly calculated to cover overhead and profit, contractors are likely to maintain profitability on a daywork project. |
For owner-developers who are tackling projects with an unpredictable scope of work, a daywork contract may provide them with the flexibility they need to manage unforeseen events. Meanwhile, contractors are more likely to be profitable, as they have a guarantee that, no matter what, the owner-developer will compensate them for the time and materials they use.
Drawbacks of daywork contracts
While daywork contracts offer great transparency and simplicity, they suffer from a lack of a defined budget and a need for more detailed cost tracking.
To minimise these disadvantages, owner-developers and contractors must establish a well-structured contract, build a solid relationship and make it a priority to communicate and be transparent.
For Owner-Developers
| Drawback | Description |
|---|---|
| No established budget | Due to the uncertainty of the scope, there is no established budget, which opens up the owner-developer to greater financial risk. |
| Requires a trusted partner | Without a trusted partner, owner-developers may worry that the contractor is stretching the project out to increase their costs unnecessarily. |
| Offers no incentives for efficiency | As a contractor is compensated for the number of hours worked, they are less incentivised to work efficiently. |
For Contractors
| Drawback | Description |
|---|---|
| Requires detailed cost tracking | In order to get compensated, the contractor must provide a detailed breakdown of all costs incurred throughout the project, requiring a sophisticated financial management system. |
| Upfront financial burden | Subcontractors using daywork contracts can struggle with cash flow issues as they bear the upfront labour, material, and overhead costs until they are reimbursed by someone higher on the payment chain. |
| Difficulty managing client expectations | Due to the undefined nature of the project’s scope, it’s difficult for the contractor to initially provide accurate estimates to the owner-developer regarding the overall cost of the project. |
Trust is vital to the success of any construction project – but especially so for daywork projects. Since there is no fixed scope or budget, owner-developers have to trust the contractors they choose. Otherwise, they risk funding a project that may either turn out poorly or never see the light of day. For this reason, owner-developers typically only offer daywork contracts to contractors they have worked with before, as there is already a foundation of trust.
Here are a few ways to mitigate the pitfalls of a daywork contract:
- Building on an established relationship: Daywork contracts are often the most efficient and deliver the best results when there is trust between both parties. The contractor is able to tackle problems onsite quickly and efficiently while the owner-developer is assured that the contractor isn’t cutting corners or inflating hours in order to increase earnings.
- Adding in a ‘not-to-exceed’ (NTE) clause: Incorporating an NTE clause into the contract decreases the owner-developer’s risk and provides them with greater financial certainty. For the contractor, this removes the burden of managing the owner-developer’s expectations around budget because the cost is capped, like a GMP or lump sum contract.
- Establishing clear communication: Maintaining open and clear communication throughout the project can help prevent any potential issues from escalating into larger problems.
Daywork contract example
A large retail company approaches Finley Construction, a head contractor, asking them to renovate a store recently damaged by a storm. The owner-developer wants to quickly get a contractor onsite, so that they can see what work must be done to get the store operational again.
Since the owner-developer is uncertain about the project scope, cost and duration, they propose a daywork contract to speed up negotiations and start construction sooner. Fortunately, the two parties have worked together before, so the owner-developer is comfortable with offering this type of contract.
Using estimating software, Finley Construction takes the time to calculate a few things: loaded labour rates, wages, overhead costs, markup and unit prices for required materials. They then submit this pricing information to the owner-developer. From there, Finley Construction and the owner-developer negotiate and sign the contract, including standard terms around payments, variations, dispute resolution and more. While a daywork contract can put an owner-developer at financial risk, the trust between the two parties mitigates this risk.
From here, the magic begins. Finley Construction, with the help of trusted subcontractors, quickly mobilises onsite and gets to work. Along the way, Finley Construction follows the contractual payment schedule, submitting monthly invoices to the owner-developer, clearly outlining the hours worked and materials used, and normally with proof of this incurred cost, through the likes of invoices etc.
The owner-developer reviews the invoices and pays Finley Construction, which, in turn, the company uses these funds to pay their subcontractors. These invoices serve as a ‘cost update’ for the owner-developer, enabling them to keep track of spending within the context of the overall budget.
During construction, Finley Construction realises that a storm caused extensive water intrusion and damage to the store, creating a demand for more extensive remedial work than originally planned. With the flexibility of the daywork contract, Finley Construction informs the owner-developer. They describe the nature of the problem, what needs to be done to resolve the problem and how resolving the problem will change the scope, timeline and budget. The owner-developer agrees to the change of scope.
Once construction is complete, Finley Construction compiles all documentation related to the project, including invoices, receipts and timesheets. The contractor gives the owner-developer these documents and the final invoice outlining the total project cost. The owner-developer conducts a final inspection and approves payment to Finley Construction.
A daywork contract was perfect for this scenario, as it enabled both parties to manage their priorities. The owner-developer wanted to quickly tackle the project with an undefined scope and unclear duration,and since the owner-developer had worked with the contractor before, they were able to bring Finley Construction onboard quickly. Under a daywork contract, Finley Construction turned a healthy profit, as they were able to correctly calculate their loaded labour rate and material costs.
With a daywork contract, Finley Construction quickly mobilised onsite, handling a tricky construction project with an unclear scope. Being on good terms with the owner-developer made it easier for Finley Construction to deliver a prompt, seamless and high-quality outcome.
Contract formation determines success
Understanding the ins-and-outs of the key construction contract types can significantly impact the success of a project –for both owner-developers and contractors. During the contract negotiating process, an opportunity arises for both parties to come together, communicate their priorities and reach a mutually beneficial agreement that carries minimal risk.
By having a well-defined daywork contract, both owner-developers and contractors can communicate effectively, adapt to unforeseen issues and deliver a high-quality construction project – even when the conditions are uncertain.
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Written by
Tamara Harris
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