What’s in a Construction Contract
The crux of the construction contract for a new home lies in its key elements; they are the components that will create a guide for the end result. These elements include:
He and his family were prepared for the home and were excited about buying a piece of property they could build on to suit their needs. He asked the builder to go over the contract with him so they could prepare and understand what they needed to know.
Scope of Work – The scope of work refers to more than just the general layout or design of the house. It is the specific plans to be followed, materials to be used, price of materials and changes that can be made. It details how many stories the house will be and whether or not it will have a basement or garage. It lists the materials to be used on the home, such as the style of roof and whether or not energy efficient windows will be installed. The scope of work also outlines the number of fixtures and the quality of the interior doors.
Timeline – The timeline specifies when the work will begin and when the project will be finished. The estimated completion date is important for the buyer to be able to move into the house on schedule and for the builder to be finished with the project on time . If the deadlines are not met, one party may be in breach of the agreement.
Project Cost – The cost of the project should be outlined in the contract. This allows the buyer to budget not only the cost of the house, but also any upgrades or changes to the home. He may even have allowances for each item or a total amount for modifications. The builder knows exactly what is expected of him in terms of cost. He will spend extra if the buyer chooses to upgrade the home.
Payment Terms – Home loans are backed by banks, but a buyer does not have to pay for his home all at one time. He may have a 30 year or 15 year mortgage with monthly payments that he makes to the bank until the loan is paid in full. The builder may be paid in stages as certain aspects of the home are completed. The system will allow the buyer to be certain the builder sticks to the guidelines of the contract.
The contract details the expectations of both parties as a legal protection. Even if a verbal agreement has been made, the contract stands as proof as to what should be done. A contract is binding and enforceable in court and can be amended once signed.
Common Contract Terms
If you have learned anything by now, it is that you need to look at your contract and understand the contractual terms for your new home construction. We are going to take a deeper look into some of the common terms and clauses found in construction contracts for new homes. Below are some of those terms and clauses and what they mean to you in your home building process.
Substantial Completion
This means that after all of the punch list items are addressed, the home is ready for occupancy and the home is compliant with local code requirements and the plans. This is not a strict definition and there is no consensus on what it means. This is also a time when a walk-through is done and items are identified which need to be completed. The definition often has an inclusion of the notion that the work will be completed within a certain period of time. This is often followed by the retention of 5 or 10 or some other percentage of the contract price. Often it is stated that the remainder will be paid within 30 days. It is very important to understand what this means in your context.
Retention
The retention is the percentage of the contract price that is held back until the work is completed. The amount of the retention can vary greatly, from 0% to 15% of the contract price. If you are aware that it will be held back and you understand how it will be released, you should not have a problem with it. However, you do not want to see large amounts withheld as the situation advanced. You should receive the full amount of the retention upon substantial completion of the home.
Change Orders
These are written requests to change the contract or specifications. The contract should provide what is required in a change order. Typically, it requires the change order to be in writing and to be signed by both parties. The work cannot start until the change order is agreed to and is signed. Also, the price on a change order should not be inflated just because it is a change order. Many builders will want to make up their time on a change order and that may be a fair request provided that the pricing on the change order is not excessive.
In the case of a breach by the builder, it is good to have all of the change orders identified. I had one situation where the builder was in default and they figured out that the original contract amount was sufficient to repair the defects and complete the house. However, at trial they used the change orders to show that the builder could not afford to complete the house for the original contract price. The builder awarded them a sizable sum of money for the cost to repair and complete the home. It was the change orders that gave rise to that award.
You should understand not only your rights under the law, but your rights under the contract.
Construction Contract Responsibilities
By signing the home construction contract, the homeowner agrees to fulfill all responsibilities set forth in the contract. These obligations include things such as timely payments, selections of products and materials, and coordination of work by other contractors under the general contractor.
The homeowner generally incurs the expense of the mortgage of the new home and any existing home that the Builder has agreed to help in selling if the existing home is not sold within the time period provided in the Agreement. The homeowner generally agrees to provide all easements for construction and access, to maintain proper insurance coverage, and to file and prosecute any claims with the governing authorities to obtain any required approvals or permits in a timely manner (which is important because necessary approvals and permits are often a delay in getting started or continuing the project).
These are just a few of many responsibilities that the homeowner has agreed to have under the contract.
The Builder also has responsibilities set forth in the contract that are often overlooked or taken for granted by homeowners. They include the obligation to hire and supervise all subcontractors properly and ensure that all risks and disputes associated with the hiring of the subcontractors are resolved. Generally, the Builder must maintain all required licenses, workers’ compensation, and liability insurance throughout the construction. Many times the Builder is obligated to pay the cost of all clearing of the lot and to haul away the dirt that must be moved for the construction (the contract can provide for a reasonable size "cut"). Most contracts with residential homeowners require the Builder to obtain express approval from the homeowner before any changes are made to the plans or specification, eliminating the concept of "field changes" or "changes orders" unless expressly approved by the homeowner.
Examining a Construction Contract
On some level, you will never be able to fully understand the contract before you sign it. But if you understand certain aspects of the contract, you can be better equipped to know what to look for and to understand what the terms of your contract should be. Note, however, that even a homeowner who is familiar with new home construction may need to seek legal counsel of their own as the specific provisions and conditions have undoubted legal ramifications.
Here are a few things to consider:
A good construction contract should be about 30 pages long. This will include the contract and exhibit(s) that is comprised of the blueprints and plans of the house. There will usually be a cover page for the construction agreement that essentially states the owner is hiring the builder to build the home. The document will contain a list of materials and the blueprints for the job. The cover page and the blueprints will provide the builder a lot of information on how to build the contract. Therefore, it must be very clear on the cover page and the blueprints exactly what you want. The construction contract will also contain what is called a "scope of work". The scope of work outlines the work that the builder is required to adequately provide for the home. The next section of the contract deals with allowances. Allowances are a huge portion of any new home construction contract. These should be tightly drafted and concrete in their obligation. The allowance or allowance section of the contract should not be subject to interpretation. It should state clearly what the builder will allow with regard to electrical outlets , cabinets, and plumbing. There can be an allowance for what type of granite stone the homeowner is permitted to utilize and how much of it, or how much granite tile. If no allowances are in the contract, it is a very large problem. Leave this up to interpretation and permitting and you will likely pay the price. The builder may state they plan on discussing these allowances with you later and you will be responsible. If that is the case, change the wording of the contract immediately. Negotiate with the builder how much granite can be used in the kitchen countertop. Be sure to seek legal counsel if you feel the contract is not right. There are certain contracts that are so one-sided that nobody should ever sign them. Many builders know that, but also know that a homeowner really needs to buy a home. With this knowledge, they place provisions in the contract that are pretty unreasonable. In addition, there are certain things that a homeowner should not ever allow. One example is a name-of-buyer clause. A name-of-buyer clause states that the builder has the right to name the person that buys the home. Some builders fear that an owner will name themselves as the buyer and try to avoid paying the sales tax. This is not the case, however. That is why the county assessor’s office states the name of the owner of the property. The builder should not be able to add a name of buyer clause. Any clause of this type should be stricken from the contract.
Addressing Disputes
Even if the exact content of your contract is a mystery when you use a homebuilder, you can expect that the contract will have a dispute resolution provision. That means that, as a homeowner, you need to be aware of how to handle disputes with the builder should they arise. Commonly, contracts will have provisions for both mediation and arbitration of disputes. Frequently, the contract will provide that the mediation and/or arbitration be conducted by the American Arbitration Association (AAA).
Mediation is an informal process where both sides to a dispute attempt to find an agreeable solution with the assistance of a third party neutral, the mediator. The mediator will listen to both sides, trying to find areas of agreement as well as areas where there could be compromise. The mediator will help to facilitate the effective communication of both sides. Unlike in court, the mediator cannot make decisions for either side. If this process does not satisfy both parties, the next step is likely an arbitration.
Arbitration is a more formal process. Essentially, each side presents its case before one or more arbitrators. The arbitrator or arbitrators then render a decision. Typical construction contracts require the prevailing side to be entitled to recovery of its costs and fees from the other side. As with mediation, this is not as formal as a trial in a court, and the arbitrators attempt to avoid letting emotion get the better of them. Nonetheless, it is always better to resolve matters in mediation rather than arbitration or litigation, which are explained below.
In most circumstances, bringing a lawsuit is the last step. It is the most formal of the three dispute resolution processes, which means it is also the most expensive. When a builder is brought before a judge and jury as the defendant, the parties will seek to ascertain the facts of a given case. Each side can investigate e.g., whether the builder actually performed a particular portion of the work. Be aware that a lawsuit usually requires that the parties be prepared for the fight for a longer period of time than they would like. Again, the need for a lawsuit is not common, but not unknown.
Best practices in the construction industry suggest getting disputes resolved through mediation. The process is controlled by the parties involved. Not only will this generally reduce the cost of getting the issue resolved, but it will also preserve the working relationship between the homeowner and builder. In the end, the homeowner will get closure on the dispute, and the builder will avoid litigation and associated costs.
The Need for Customization
A construction contract is not a "one size fits all" document. Every construction project is different, and so are the needs of each homeowner. You do not want to use a generic contract. It should be custom tailored to fit the specific project and the needs of the homeowner.
Consider the following examples. If your project includes custom cabinetry, it is important to provide for the precise finish at the outset and to obtain any additional payments prior to installation. If it includes custom millwork, the contract should detail the specifications required to create the homeowner’s desired look. It should also address the schedule and details for any special work items that will take longer than other work items to complete, thus impacting the timing for other work. If you are planning to seal the parking lot on April 15, your contract should state that the date may be moved forward or backward depending on the weather . Landscaping is complicated and depending on your budget, can take years to be fully installed, which may require the homeowner to provide for ongoing maintenance obligations and repairs throughout the installation period. Perhaps your drawings include a pergola for a balcony that is no longer practical in the final design. The contract should clearly define what is – or is not – included in the scope of work so the homeowner is not stuck with an incomplete and unrealistic expectation.
If your contract does not address these issues, the homeowner may be forced to accept whichever finishes are available at the time of installation or wait months for them to become available. This could result in a significant change to the look of the project – and disappointment for the homeowner – if the project is not constructed as the homeowner intended. And your project may not be completed on time, causing the homeowner to seek damages for lost opportunity while waiting for other work in the house to be completed. This is why a detailed contract is very important.