ELEMENTS OF A GOOD CONSTRUCTION CONTRACT
Please Note: This article 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 professional.
*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 pricing.
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.
b) DATES: 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.
c) CHANGE 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 any project.
** 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:
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 contract.
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 responsibilities.
**NOTE: Checking 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.
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.
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.
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.