A well-drafted construction contract clearly sets out the work to be done, the price to be paid for the work, and the terms and conditions of payment. The contract should also allocate various foreseeable risks between the parties. When the parties allocate a list of potential risks, the contract becomes longer, but it reduces the potential for disagreements in "gray areas" that are not addressed at all - assuming that both parties take the time to read and understand the lengthy, dryly-worded document. Of course, failure to read a written agreement is not a valid defense.

Because the subject of contracts is covered in depth elsewhere, the fundamentals of contract law are not addressed here, but contractors should be aware that all of the requirements of basic contract law must be met for a construction agreement to be valid. We will focus here on construction-specific applications of contract law.

Construction contracts are often formed through the bidding process. The owner requests a quote or issues a more formal request for proposals, and contractors wishing to perform the described work respond with the price that they would charge. The contractor's bid constitutes a binding offer, which if accepted, results in a legally enforceable contract. The acceptance of a bid is generally referred to as an "award" of the contract.

In the case of private construction contracts (as opposed to government contracts), the property owner requesting bids is generally free to accept or reject any bid, regardless whether the bid is the lowest or most responsive one. In the case of public contracts, however, the bidding process must follow strict rules set forth in federal, state, and local laws and regulations.

Construction contracts consist of terms of agreement ranging from price and description of materials to be used to an agreement that any disputes will be resolved through arbitration. Courts are reluctant to imply terms that are not expressly part of the contract, but courts may look to local custom if the contract is silent on a hotly disputed key issue.