is solely for informational purposes.
The views and opinions of the author expressed herein do not necessarily
state or reflect those of the Western Area Builders Association. The Western Area Builders Association and
the author expressly disclaim any responsibility for any damages arising from
the use, application, or reliance on any information contained in this
article. The ideas presented in the
article are not a substitute for considered professional advice. If specific legal advice or professional
assistance is required, the reader should seek the services of a qualified
*This list is to be used only as a guideline in
putting together a good construction contract.
The Western Area Builders Association advocates good business
practices of our membership and is intending to provide an example of what
should be in a good contract – protecting both the Contractor and the home Owner
in any contract signed for renovations or a new home. The Association recommends that you have an
attorney familiar with home construction contract and warranty laws read over
the contract you have been presented or provide you with a complete
contract. It will always be the
responsibility of the home Owner to perform “due diligence” during the signing
of any contract and during the process of the construction project. The Western Area Builders Association
wishes your project to be hassle free, soundly constructed, environmentally
friendly and as beautiful as you thought it would be.
Each contract should have the elements listed below
and not necessarily in any order. WABA
recommends all items be in writing so they are legal and binding and must have
a signature of all parties involved. [Verbal
contracts can also be binding but are difficult to verify in court]. Contracts
can be fixed price or time and material, but should include the following
information as a minimum:
1. INFORMATION ON CONTRACTOR: Legal name of the Contractor you have
chosen and the name of the Owner, complete addresses, license number,
certificate of liability and worker comp insurance, contact phone numbers and
email addresses for ease of contact.
2. INFORMATION ON OWNER: List names and contact information of all Owners. When decisions or progress reports need to be
made the Contractor must have contact information of those making the
decisions. If a third party has been
hired by the Owners to complete that task, that information should also be
available to the Contractor.
3. INFORMATION ON PROPERTY:
a) Legal address and
legal description of the subject property, tax ID numbers, proof of
ownership and a property survey should be included in the contract. The survey should identify all property
corners, easements and any pending zoning changes. If there is an architectural review board it
will need to be noted with contact information.
Special easements, fence lines not in conformance with the survey,
limitations on water and sewer, high water tables, power supply issues etc.,
can all affect the ability to complete the project and can potentially affect
b) Environmental conditions and any required
remediation can be costly and should be a part of any land purchase agreement
and should be completely understood prior to signing such agreement. Any other constraint on the property should
be noted on the purchase agreement.
4. INFORMATION ON ZONING PERMITS: Owners and Contractors must agree and check
zoning for setbacks when locating the home on the subject property. Driveways, water lines, sewer and septic
systems and their locations must conform to local laws and be agreed upon by
both parties. Contract should also state
who is responsible for providing information and obtain any permits required outside
the actual building permit. Also who
will be responsible for paying for each permit required?
5. INFORMATION ON PROJECT:
a) Architectural and Engineering
specifications and complete CONSTRUCTION DRAWINGS with detailed dimensions and
elevations should be included by reference as part of the total contract. This will provide the Owner and Contractor
with a complete understanding of the scope of the project and assist the Contractor
in arriving at a responsible price guarantee to the Owner. Any special consideration for structural
loading conditions can be discussed as well as landscape design to avoid any
water drainage problems.
**All plans, described
details, written details and specifications should be noted in the contract as
being part of the contract and that dimensions on the plans take precedence
over written dimensions. Without
specifically stating these are part of the contract they may not be allowed in
any legal proceedings. For time and
materials projects all details should be spelled out and a “not to exceed”
clause should be considered.
Each contract should include the conditions to be completed prior to a start
date and once that date has been established the date of completion. Neither Owners nor Contractors want to drag
out a project and establishing a completion date is an effective means for both
parties to proceed with planning to complete that objective.
ORDERS: This can be the most
frustrating part of a construction project. How they are requested, who can
request them, and when payment occurs should all be part of the contact. Contractors should state when a change order
is too late to be effectively incorporated into a project. They have the option of denying or performing
the requested change. The contract
should state specifically when the change order is to be paid and typically it
is paid when the change is performed or the change order is approved. Sometimes Contractors will allow a statement
from the lender agreeing to add the change order to the final construction
payment or the next payment due.
Discussing this with the Contractor prior to signing a contract can
avoid a lot of frustration during and at the end of the project.
d) SPECIFICATIONS: The Contractor
should supply a complete list of specifications for the materials selected to
be installed on the project.
Availability and color can affect the price and schedules. Colors and manufacturers should be selected
prior to starting the project to minimize shortages and delivery times causing
project delays. It is important to
obtain as much detail as possible, for both the Contractor and Owner, to have a
complete understanding of the entire project and for the Contractor to provide
Owner with an accurate price structure.
Information and communication are always the most important aspects of
** Special features – research, knowledge and
communication are extremely important when making the largest monetary purchase
of your life. Research will provide you
with the ideas and options you may want in your new home and you should
communicate those with the Contractor.
The more information you provide the Contractor, the better he/she will
be able to put your project together including those special features. Items like: siding and shingle choices,
insulation packages, foundation types, heating and ac systems, radon, cabinets
and countertops, windows and doors, interior trims and doors, hardware, and
floor coverings are areas where you can make the selections you want to make the
house “ your home”.**
e) ALLOWANCES: Contractors
often use allowances when items are either unknown or selections/colors have
not been made prior to signing the contract.
Allowances should be carefully listed and spelled out so everyone
understands what they are for, the amount of dollars included in the contract
price and how they are to be adjusted when final costs are known. Allowances should be listed as they compare
to the original listing and details provided by the Contractor as the reasons
for the change in pricing.
f) PAYMENTS: The contract must define how and who will be making
payments during the construction process.
The contract should spell out when payments are due, the amount of each
payment and what the remaining balance is.
The Owner and Contractor should agree on the amount to be held back for
the final payment. For Contractors
paying for materials and performed labor, timing of construction payments is
critical. Time is of the essence for
most Contractors and once they have performed the work they should be paid to
the terms of the agreed upon payment schedule. Owners should verify with their financial
lender all payment(s) and terms.
g) FINAL PAYMENT: Final payment
is due when all work including punch list items have been completed and
inspected and a certificate of occupancy has been issued. The contract should state what amount of the
total contract is the final payment amount (usually around fifteen to twenty
percent is normal) and that it should be paid at final completion and not
substantial completion. (There is a
difference!! Substantial Completion is
when most of the work is complete and the inspector is willing to provide a
temporary occupancy permit) Depending
on the Owners personal circumstances this may be an option but it is good
practice to hold back funds for final completion. All lien waivers should be turned in at this
point making sure all suppliers and subcontractors have been paid. Warranty work is not subject to final payment
or hold backs for unfinished work. Look
under warranty items for options.
6. LIEN WAIVERS: A lien waiver, waiving Owner’s responsibility
to pay any additional funds for the work completed should be delivered to the
Owner directly upon payment of the funds requested. Owner/Contractor should obtain a partial lien
waiver for all payments during the project and a final lien waiver, covering
the entire project, at the final payment.
If the Owner desires and confirms with the Contractor prior to signing
any contract, the Owner may pay all suppliers and subcontractors directly. Owner is then responsible to collect all lien
waivers signed by the subs and keep them for their records.
7. BUILDERS RISK INSURANCE should be
provided to both the Owners and the financial institution they are working
with. The Contractor should provide and
pay for this insurance during the entire construction process. Owners may also wish to produce their own
home Owner’s policy with a construction rider to protect themselves from any
other unforeseen loss. Sometimes Contractors
require the Owner to produce this type of policy. Check with your insurance agent to make sure
you understand all the conditions of your insurance. This information should be spelled out in the
8. RESPONSIBILITIES: The
contract should identify who is responsible for managing the project with
contact information and provide a list of all suppliers, who will be delivering
product to the site and subcontractors performing work on the project. The responsible party should maintain this
list assuring each trade is licensed, insured and capable of performing the
required tasks to complete the project.
This information should be available to the Owner.
a) Owner’s responsibilities – The contract
should clearly state what the responsibilities of the Owners are and when they
must be completed. Items such as soil
conditions and testing, submitting for zoning approvals, architectural reviews,
utility applications, permits, and site
access are to name a few. It is
extremely important to understand differences between the Owner and Contractor’s
with the Western Area Builders Association is a good way to check on the
Contractor and subcontractors as they can provide information as to their
status with the State of North Dakota.
In general, Contractor and subs, which belong to the local association,
are fully engaged in their industry and want to be recognized as professionals
in their specific fields.**
9. ATTORNEY FEES: The contract should
spell out what and who will be responsible for any attorney fees and have a
recovery clause. It is always a good
idea to have your attorney either prepare or review the contract prior to
signing it. Only signed agreements are
enforceable so make sure you understand what you are signing and who and what
you are obligating yourself to. Once
signed you are obligated to the terms and conditions of the contract.
10. ARBITRATION: The contract should
clearly spell out if the Contractor and Owner are willing to enter into a
binding arbitration agreement. Most home
buyers and Contractors prefer this method rather than the expense and time of
going through a legal trial. Binding
arbitration is a method of both sides hiring a third party knowledgeable person
who also understands the law, to listen to both sides, collect any evidence and
make a binding resolution, solving the issue for both the Owner and the Contractor.
11. WALK THRU: The contract should contain
a clause requiring a walk thru with Owner and Contractor at substantial or final
completion. It is at this point a “punch
list”, items that need repair, refinishing or replacement; need to be
identified prior to closing or final payment.
Once completed, the Contractor will only be obligated for warranty work
and additional refinishing, replacement or repair will be up to the Owner. Be thorough on your walk thru! This is your project and your money to put it
together. Every Contractor should be
excited for the walk thru to show his/her professionalism and pride in the work
they have completed.
12. WARRANTY: Your contract should state the warranty
conditions required in the state in which your project is located. Under normal conditions you are assuming the
Contractor will honor his pledge to return and pay for all warranty conditions. Most Contractors honor these conditions but
situations may arise like: death, moving the business, change of ownership
etc., where the warranty may not be honored.
As the Owner you can request from the Contractor an insured written
warranty that the Contractor would provide and would be issued by a third party
insurance company. This warranty is put
in place and taken care of by the insurance company in case the original Contractor
was unable to perform the repairs.
Remember oral agreements are not part of any warranty.
13. TERMINATION: Every contract should have a termination clause. It should provide an understanding by both
parties as to the rights, responsibilities and conditions should either party
find it necessary to terminate the contract and release the other from any
additional contractual obligation. It
should also state conditions of “stop work” on the part of the Contractor and
what remedies are required before the Contractor “returns to work”, prior to
any termination. The termination clause
should also state the payment conditions for any termination, and the
obligations of each party.
“The better the contract – the better the
project”. BUT it will still take “Due
Diligence” on the part of the Owner to make sure what was promised under the
contract is what is delivered.
- David J. Nordenstrom of Nordenstrom
Custom Homes, Inc. - March 2016
for the Western Area Builders Association (WABA).