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Construction contracts are agreements between two parties typically involving the exchange of goods or services for money, such as building a house. The simplest form of a contract can be a verbal agreement, which is legally binding but challenging to prove in case of disputes. Therefore, it is crucial to have everything documented in writing. The speaker shares a personal experience from the first six months of their business, where failing to formalize a contract resulted in a $3,000 loss, emphasizing the importance of written contracts to avoid similar financial setbacks.