Before proceeding with construction of your new home or remodeling project, you should carefully review and sign a contract with your builder or remodeler. The purpose of the contract is to protect both you and your builder or remodeler by carefully identifying the: scope of work, terms and conditions of construction, payment schedules and post-project expectations such as related warranty work.
A variety of problems can arise duringÂ the course of construction and and a contract can help address their resolution. Just ask yourself “what could go wrong in terms of the builder’s or remodeler’s performance or financial stability?” Then, make appropriate provisions in the contract.
There is no standard form of contract agreement, although many professional builders and remodelers likely already have a contract that they use, with appropriate modifications made for each specific project. Regardless, plan to have the contract reviewed by your own legal counsel to ensure that you are protected.
Many home owners or potential home owners fail to realize the difference between a contract and project drawings and specifications. Contracts are legally binding documents while project drawings and specifications are simply documents upon which the builder or remodeler has based their price and commitment to perform the work. Your contract should incorporate the drawings and specifications by reference, thereby obligating the contractor to proceed with the work accordingly.
Commonly, contracts are financially constructed either on a “fixed price” or “cost plus” basis. Both methods have pros and cons. In general, the better defined the project is at the outset, the more likely the “fixed price” option is the best solution. For projects where you as the home buyer or home owner expect to be making decisions and/or changes as the project progresses may decide to take the “cost plus” approach to avoid potentially high change order charges to a “fixed price” contract. Sometimes “cost plus” contracts have a guaranteed maximum price associated with them as a means for constraining overall project costs.
Methods for paying a builder or remodeler should also be defined in your contract. On projects taking less than thirty days, the builder or remodeler is typically paid a down payment, with the balance due upon completion and acceptance by the owner. On projects taking more than thirty days, payment to the builder or remodeler generally involves progress payments (e.g., monthly, by phase, etc.) based upon the progress and value of the builder’s or remodeler’s work, with the final payment being madeÂ following completion of the work and the owner’s acceptance. If the owner is financing the project through a commercial lendingÂ institution, the lender will likely visit the site each month, certify the progress of the work, calculate the loan disbursement payable to the owner, and issue a check to the owner which will then be signed over to the builder or remodeler.
Retainage is a holdback from the progress payment and/or the final payment in an amount, generally about 5 percent of the contract price. The purpose of the retainage is to leave enough money in the contract for the owner to complete any uncorrected or uncompleted work in the event that the contractor fails to do so within a reasonable time.
Once construction has begun, owners generally do request changesÂ in the work. That’s just human nature. The handling of these change orders needs to be addressed in the contract, and is typically addressed with a provision that change orders need to be agreed upon in writing before the builder or remodeler proceeds with the work. The written change order should address issues of price increases or decreases and impacts on the construction schedule.
An allowance constitutes a dollar value of the contract price which has been set aside for the purpose of financing a distinct portion of the work, such as light fixtures, floor coverings, etc. For example, if the owner has not quite made up their mind about selection of floor covering, bathroom fixtures, or kitchen countertops, the contractor will plug a figure (i.e. an allowance)Â into the contract to allow for the labor and materials associated with installation. If it turns out that the owner selects bathroomÂ fixtures costing more than the allowance, the owner is obligated to pay the builder or remodeler for the excess. And, of course, your contract should also work vice versa.
The owner should request a warranty from the contractor that states all work will be performed in a commercially reasonable manner and there will be no defects in the labor or materialsÂ furnished to the project by the builder or remodeler. The warranty should be for a period from one to six years, depending upon how much the owner is willing to pay for the warranty. Typically, builders or remodelers will provide a one-year warranty. The owner should request the builder or remodeler to provide to the owner all written warranties for all manufactured or consumer products which are installed during the course of construction such as roofing materials, appliances, windows, heating and mechanical systems, etc.