Daywork Contracts in Construction: Guide for Contractors and Owner-Developers

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.

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.

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:

1. Determine loaded labour rates, which include wages, overhead and administrative costs and profit markup.
2. Identify and price the necessary materials for the project, including freight as well as the contractor’s markup.
3. 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

For Contractors

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

For Contractors

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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