Construction contracts – yes, even residential construction contracts – are complicated agreements. They govern very complex projects and a dynamic process. There is a handful of topics and issues that are the source of an overwhelming percentage of the squabbles between contractors and customers. If these topics can be expressed properly in the contract and managed closely during the construction process, contractors and customers can steer clear of many of the problems that can turn the construction of a dream home into a nightmare.
Use The Right Form
Too often we see construction deals that start with the wrong basic form of agreement. If a builder owns the lot and is going to build a home on it for the customer, the contract shouldn’t cover just construction. It needs to contain provisions on title to the real estate and most other provisions that a standard residential real estate purchase agreement typically contains. PLUS, it has to cover the terms of construction. Vice versa, if a customer owns the land and is just hiring the builder to construct the home, the agreement generally should not be a standard “purchase” agreement dealing with title to the property and pro-rations of real estate taxes, etc. These are two very different transactions requiring dramatically different agreements.
Both contractor and customer should have a very clear understanding of what constitutes the construction plans. Whether it’s the “Plans,” the “Construction Documents,” or some other nomenclature or defined term, make sure the agreement clearly sets out what is to be constructed, with actual final documents listed (potentially with each page initialed). This includes all the engineering documents (blueprints, details, site plans, framing plans, electrical plans, plumbing plans, grading plans, landscape plans, etc.), specifications, customer allowances and selections, and any other document that sets out or describes what is going to be constructed. Have a firm baseline of all work that needs to be done. Otherwise, this is very fruitful ground for misunderstanding.
Insist on written Change Orders and manage that process carefully. If something changes the content, cost, or timing of construction, then the contractor and customer should put it in writing promptly. Ideally this should be done in serially numbered Change Order forms signed by both contractor and customer in a format agreed to in advance. Way too often, single change orders are presented at closing for all the verbal changes that have been “agreed to” over the course of construction, and that Change Order adds significant and unexpected dollars to the total price of construction.
No Mechanic’s Liens
The contractor should be required to pay all subs and suppliers when due – before any liens are filed against the property. It often makes sense to give the contractor a reasonable out in the event of a legitimate dispute with a subcontractor or supplier. If such a dispute arises and a subcontractor or supplier liens the property, the contractor is often allowed a relatively short time to pay the lienholder and discharge the lien, or to pay into court an amount sufficient to make the lienholder whole in the event the lienholder prevails in the litigation.
Often terms of payment are dictated to some extent by customer’s lender and the terms of customer’s construction financing. However, a good construction contract will contain significant detail on progress payments and the payment process. The last thing a customer wants is to have paid for a lot more than has been constructed, and then have the contractor walk away or file bankruptcy – especially if they took your money and, say, didn’t pay the lumber bill. Most contractors do not operate that way. However, as in any profession there are unscrupulous contractors out there, and being left with only a claim against the state contractor recovery fund rarely makes the customer whole.
Hold-backs and Punch List Escrows
Residential builders are taking harder stances on these types of items. Historically, a customer has been allowed to hold-back from “final” payment an amount equal to 150% of the estimated cost of any defective or uncompleted work. This is designed to give the contractor a real incentive to come back and do the punch list items beyond just reputation and taking good care of customers. But, many residential builders are simply taking the position they don’t do punch list hold-backs. Before customers agree to that they should satisfy themselves that the contractor has a reputation and long history of wrapping up projects to customers’ satisfaction.
Right To Complete
Typically a customer is going to have rights to take over and complete construction in the event of a contractor’s material breach of the construction contract – including the right to use plans and take over incomplete portions of subcontracts for the purpose of completing construction. This is usually an important term to the customer that most legitimate and reputable builders do not have strong objection to because it only arises in the event of material breach by the contractor and is generally limited to completion of the specific project.
This is far from a complete discussion of these terms and provisions and far from a complete list of all terms and conditions that should be in a residential construction contract. However, if the parties and the contract handle these well, the contract should have a solid foundation upon which to build the rest of the terms.
The lawyers at Sanford, Pierson, Thone & Strean, PLC are well versed in these agreements and related issues and would be happy to work with you in preparing, or reviewing and revising, residential construction contracts. In addition to real estate law, Sanford, Pierson, Thone & Strean, PLC has extensive experience with estate planning, corporate/business law, litigation and creditor remedies.