Residential Construction Contracts: What to Look For

Residential construction contracts can be biased to the builder especially if the builder writes or provides the contract. There are certain things you should look for and others you should completely avoid. What I propose to do in this article is to tell you what must be in the contract along with what items you will want to change. If the contract is totally biased or is just full of holes, you can always add an addendum to fill them, but holes are a red flag saying to me that the contractor is already trying to skimp on the project. Before signing any contract, have your attorney look it over or at least have someone in the business look it over to keep you from being taken advantage of.

The first and most obvious thing to look for is the names, addresses and contact info of all of the parties involved. Second is the date of the contract along with a date that the work should start. You might also want to add the location of the work to be completed including the street address, the subdivision if applicable and any rules that may be enforced by the homeowners association (I have worked in several neighborhoods where work was prohibited on Sundays and after five in the evening). You will want a total amount of the project along with a procedure for modifying the contract in case you decide you want more work done or want to change something (this is typically called a change-order). What you want to watch for here is that you can end up paying to remove an item. I knew a couple who were building a log home, the builder charged them $1500.00 to remove an island in the kitchen. Now this is fair if it's a custom item and has been ordered, but this was early in the project and they just got _________ (put your own adjective here). It is not unusual to charge a processing fee to alter a project as a item such as this could cause the plumbing, electrical and the casework plans to be changed or altered, but you have to lay out rules that are fair to both parties to prevent the builder from taking advantage.

The plans or drawings/sketches need to be made a part of the contract along with the specifications. Do not let the builder make your specifications for your project, your just opening your wallet for sub-par product. There needs to be terms of payment, it is typical to have a deposit and a payment schedule based on the amount of work completed. This is where you may need an owners representative. While building log homes, most packages included the shell being dried in with tar paper on the roof and doors and windows installed. If you were to ask the owner how far along their home was percentage wise, they would answer you that it was fifty percent complete, WRONG, the answer is closer to one third complete. The point being, it is really easy to put out way more money than work is actually complete. This is for your protection, not the builders. They will get paid. While researching this article, yes I do research. I found a standard residential contract from a home builders association in one of Americas largest cities. What I found in this contract was that the builder was to be paid one hundred percent upon substantial completion, where is your recourse if they have all of their money before final completion? Those are two very different things. In commercial and industrial construction, it is not uncommon to retain ten percent of every draw and place it in escrow for a year to guarantee the project. This is an extreme method for a twenty thousand dollar kitchen remodel, but if your building a million dollar home, it's not that unreasonable.

There needs to be a substantial completion date (a date when all major work is complete with only a minor punch list is left) and there needs to be a final completion date (when everything is done and the punch list is finished). This is something that all contractors like to avoid, saying when they will be done. You also need to include a weather delay clause allowing one and a half days for every day they are delayed due to weather conditions. This is also why you need to keep a daily job diary, more on that later. There also needs to be an abandonment clause that says that the contractor should be on the job as long as the weather is fit and that if the contractor abandons the project longer than ten days, than you will notify him in writing giving him a certain amount of days to get back to work or you can replace him. Now this can be tricky, say that he has asked you to provide water or electrical or to get the HVAC guy there and you didn't, then he has the right to wait until you do your part. That is why it is a good idea to have an owners representative to avoid this type of situation. It can also be tricky in the respect that your project has been delayed and you will have further delays trying to replace him, now he has a right to payment for work completed and you have the right to liquidated damages (the amount you attach to each days delay). You will also want to set an amount for L.D's (liquidated damages) for every day past substantial and/or final completion. This amount must be reasonable with respect to the total of the project, no contractor is going to agree to five hundred dollars a day on a five thousand dollar project, but on a million dollar project that amount is about standard.

The contact documents should also include allowances for specific items, if you specify fifty year shingles, the contractor will give you an allowance of about seventy five dollars a square (just an example). If you choose a shingle that costs ninety dollars, then you will have to pony up the difference. This is where writing your own specifications can help to prevent these unforeseen expenses. Along with the allowances, you might find that he has added a substitution policy, for example let's say that you have specified a "state" water heater and that to get that water heater it is going to take six months (these things happen). This substitution policy can help you both, by allowing a suitable substitute, you prevent a six month delay and the contractor can keep the project moving. You cannot ask the contractor to pay L.D's if you wont allow a substitution for a product that he cannot get. If your smart, you will keep a daily (or at least a weekly) diary of the project to protect yourself. If your contractor is smart, he will do the same. A job-site dairy will stand up in court, if he has one and you don't, he will most certainly win if it comes to arbitration or a full fledged lawsuit.

You will also want a formal procedure for notifying each other of your duties to the contract. For example, let's say that the contractor is ready for the HVAC (heating and air) and he tells you to get the guy there. If he just tells you and you let it slip, no one has any recourse. If you have a method, say an e-mail or a fax or even a letter, then no one can say that they didn't let the other party know. Along with a warranty and service policy, you will want to check and see if there are any documents required by state and local agencies. There is also the issue of permits and inspections and who will pay for them, normally, the homeowner pays these items, but in some cases the contractor takes care of it. The point is you don't want an unexpected permit to come up and cost you five hundred dollars that you didn't know about.

There is also the issue of who will pay for materials and for sub-contractors. This can get complicated sometimes, while looking at other contracts, I read one that said that the owner could not specify who worked on their project. Personally, I would have a problem with that and would not allow it. I would retain the right to deal with and pay the sub-contractors independently. More than one homeowner has found out that their home had a lean on it from where a sub did not get paid that should have. This is where you need to make sure your contractor has very good relations with his subs. If he is bringing in allot of subs that he has never worked with before, this can be a red flag, as contractors like to stick together when they can. You will also want to have the right to vet who works on your project. Check references, talk to their past customers, don't just get their numbers and never call them. This happens all to often, just because a contractor thinks he pulled a project off without a hitch, doesn't mean the customer felt that way, call and ask. One note on dealing with sub-contractors, before you give them the project, make a contract with them saying that you will give them five days notice before they are needed on-site, if they are not on site when they have been notified to be there, replace them without delay. In construction, time is money, your time, your money.

Finally, make sure that everyone involved signs the contract and that is it notarized with witnesses. Make sure that you both get a copy and if you can, get the original for your files. There is also another thing I discovered in a contract that I read for this piece. This contract said that any of the signatories could authorize a change order without the other party involved. Make sure that your contract cannot be altered without everyone who signed the contract signs off on the change order and require the change orders to be notarized. This could save you thousands upon thousands of dollars. Say for example that your wife or significant other is on-site and the contractor says, "Here, I need you to sign this." "What is it?" she/he asks. "Oh, just the work-order for the casework." And it gets signed without anyone reading it, then on the next draw your contractor asks for an extra twenty grand and has the paperwork to back it up. You will have to pay it, won't you? Well, I am not saying that contractors are crooks, however, some of them are and you never know what anyone will do once they are in a bind. It is also wise to pay for your own materials if you can, there has been more than one material lean against a completed home. In these times, there are five contractors going out of business for every day of the week. Don't let the contract just protect the builder, make sure it protects you as well. Good luck and good building.