CONSTRUCTION CONTRACT BASICS

In This Article
Why Have a Contract?
Risk & Money
Give & Take
Who Provides the Contract?
Which Contract to Use?
Standard vs. Custom Contracts        View all CONTRACT articles

Let’s face it: nobody likes contracts except maybe the lawyers who write them. They are usually long, wordy, repetitive, and full of hard-to-understand legal gobbledygook. And when you sign one you are left with a queasy feeling that you might have just signed away your first-born child. Nonetheless, we sign contracts every day (like when we check “I accept these terms” on a piece of software), usually without reading the fine print. In most cases, it doesn’t seem to matter what the contract says as we never see it again, so why bother with a complex contract on a straightforward construction job?

WHY HAVE A CONTRACT?

When nothing is disputed, or where little is at risk, a contract doesn’t seem to matter much. But when things go wrong with a big insurance claim, a mortgage foreclosure, or any situation that could cost us a lot money and aggravation, suddenly the fine print becomes of paramount importance. “I wish I had read this beforehand” is a common lament. Large construction projects are the perfect storm for conflicts that could cost you a lot of money. So if a project costs more than you wish to risk losing, you should consider a written contract a necessity.

By their very nature, construction projects are prone to some level of conflict or disagreement along the way. Big projects are inherently complex in the number of people, building materials, installation techniques, and regulations involved, combined with the large sums of money changing hands. All plans and specs, no matter how precise, are open to some level of interpretation. Sometimes it’s unclear whether certain items were included or not in the original bid, leading to contested change orders. The quality level of workmanship may be questioned. Errors or omissions in the plans or specs can generate disputes over who should pay to remedy these. Allowances that are too low can lead to tensions over payment.

It’s human nature that different people will view these issues from different perspectives. This makes all construction projects prone to at least minor differences of opinion, which can easily grow into major conflicts if not resolved. A large construction project is just the sort of situation where you really need a written contract and where you should read the fine print for a number of reasons:

  • Construction projects are complex, expensive, and prone to differences of opinion over money, workmanship, payment schedules, and other issues. A good contract will reduce your risk of losing money.
  • A good contract provides guidance that helps prevent disputes in the first place by providing a clear roadmap for all parties.
  • If small disputes do occur, a good contract will help nip them in the bud, and will provide a way to resolve them with the least pain and suffering (and money).
  • The terms of construction contracts are always negotiable. This allows you to create a contract that best protects your interests.
  • In the unlikely event of a major breakdown during the project, a good contract will provide guidance on how to resolve the dispute, terminate the contract if necessary, and get the project completed.

You may choose to do a small job on a handshake, and in most cases everything will go smoothly. However, if the amount of money involved is more than you’re willing to gamble, make sure you have a written contract.

RISK AND MONEY

Despite our best efforts to control and anticipate every little detail, every construction project will have at least a few surprises. Inevitably, these surprises add to the cost of the project – creating “cost overruns.” These may be due to an ambiguity or incompleteness in the plans, mistakes in estimating, prices changes in materials, difficulties with new products or materials, or the discovery of building problems (like rotted framing) that were hidden from view during the planning and bidding of the project. They may also be due to the owners changing their minds midway through the project, conflicts with the building code, or a variety of other causes.

Conflicts over who pays for additional costs is the cause of most construction disputes. Not surprisingly, each party wants the bulk of the risk to reside with the other side. How these risks, and the associated costs, get allocated is the heart of every construction contract.

Homeowners generally feel that the contractor is an expert in these matters who should know enough to investigate all the important details beforehand and anticipate these costs. If the contractor made a mistake and failed to detect a problem or anticipate a cost, then the contractor should pay for it.

Contractors generally believe that many of these costs are the fault of the owner or the designer (an agent of the owner), and that the owner should therefore be responsible. Or they may claim that the extra cost was due to hidden problems that they had no reasonable way to anticipate, and that they should therefore not be responsible.

In reality, some of these costs are clearly the owner’s responsibility – for example, a desire to move a window after it is installed. Some are the architect’s fault – for example, if their drawing indicates the need to cut through a hollow block wall that is actually filled with concrete and steel. Some are clearly the builder’s responsibility – for example, price increases from the supplier, estimating mistakes, or the need to redo work that is faulty.

Cost increases due to hidden conditions are a little more difficult to evaluate. Is this something the contractor should have anticipated? If this type of dispute goes to court, each side hires an expert with the opposite opinion of what a competent contractor could reasonably anticipate.

Bottom line: Pay attention to contractor clauses covering risk. If the contract places all responsibility for extra costs on the homeowners, whether or not they are at fault, then it’s time to negotiate or find a new contractor. For more insight, read about the Red Flag Clauses.

THE IMPORTANCE OF GIVE AND TAKE

With any luck, you’ll sign the contract before the job and never have to look at it again. If you start out with a reputable contractor, and act responsibly yourself, you will most likely work through any small disagreements or disappointments without resorting to legal maneuvers, which should always be viewed as a last resort.

In addition to clear plans and specifications, and a good contract, the key to avoiding conflicts is to be flexible and reasonable – and to seek out a contractor who will respond in kind. A successful construction project involves a lot of communication among all parties and a fair amount of give and take.

Nothing is perfect. Remember that no construction job is perfect. Wood is an organic material that shrinks and swells with changes in humidity. Buildings move, shrink, and settle over time, and certain small problems, such as hairline cracks in concrete and nail pops in drywall are impossible to avoid 100%. There will always be small gaps between pieces of wood trim. Nothing fit’s together with perfection. If you measure anything with enough precision, you’ll find that nothing is perfectly square or level. Exterior finishes are especially prone to wear and tear due to foot traffic (e.g., on decks) and weatherization from water and sunlight, and they will need cleaning, repainting, and other maintenance over time. There are many “low-maintenance” materials, but few if any no-maintenance materials.

Communicate your expectations. This does not mean you should accept shoddy or substandard work. But if you expect perfection, few projects will meet your expectations. It’s important to start out with realistic expectations and to decide what’s most important to you. Let the contractor know beforehand what your expectations are and what is especially important to you. It’s much easier (and a lot cheaper) to build something once the way you want it than to tear it out and build it twice. Be flexible where you can and hold the line when you need to. In the end, everyone will benefit from an attitude of give and take.

Sidewalk supervisors. Going around the job site with a level each day to check on the work of your builder is probably a bad idea (but more common that you might suspect). As a contractor, I had one customer who complained that the paint roller left a texture on the painted drywall – and couldn’t I do anything about it (I showed her that this texture is how all paint looks up close on any wall surface). I had another customer who complained that a bench that I built her as part of a large renovation looked too “benchy” (I modified it on my dime), and another who didn’t like the wood grain in her custom cabinet doors and wanted them all replaced (I did, and she paid for the change).

As a homeowner, I have asked for freshly installed ceramic tiles that were poorly laid out to be removed and laid out symmetrically (they were at no charge). I’ve asked for trees to be saved during excavation (they were), and for a few hundred nail holes to be filled with matching putty in clear finished wood trim on a new home (I did it myself to avoid an upcharge). Perhaps I should have fought harder on the last one, but I was very pleased with the price and workmanship on the overall job, and decided to let this go in the interest of maintaining good terms with the contractor. Remember: when the job is over and paid in full, you may still need your contractor to take care of minor repairs or adjustments (callbacks) or warranty work.

Keep your eye on the prize. You win some and lose some, but hopefully end up satisfied on balance with the big picture. Did you get close to what you envisioned, built well with good materials, and at a fair price? Then you’ve done well. So I recommend that you choose your battles wisely. If it’s really important that the bathroom tiles lay out a certain way, let the contractor know (preferably beforehand). If you’re less concerned about the roofing shingles lining perfectly up the roof, then let that go. If at all possible, work things out through negotiation and give-and-take. To sour the relationship with your contractor over small potatoes will be counterproductive as you will need to work together cooperatively for the rest of the project.

A well-written contract, with detailed plans and specs, will provide guidance on all these issues. The alternative to working things out peacefully is to go into mediation, arbitration, or to court (as specified in a thorough contract). For the amount of money generally involved, a lawsuit is not a viable option, and in cases where it is an option, it is always the least desirable and most expensive course of action. So find a reliable contractor who does good work, start out with good plans, specs, and contract documents, and then do your best to work things out peacefully.

WHO PROVIDES THE CONTRACT?

Anyone can provide the contract: the owner, architect, contractor, or a lawyer. Given that every contract tends to favor one party over another, it’s worth your while to find or develop a contract that adequately protects your interests.

Most contractors have a proposal form or contract that they commonly use, but you don’t need to accept it as is. As part of your negotiations, you can ask that they add a few relevant clauses to their contract or ask that they use your contract – as a condition of accepting their bid. If you’re not comfortable with interpreting contract language, you can have your lawyer review the contractor’s proposal or have him or her draft a revised or customized contract.

I don’t recommend being heavy-handed about contract negotiations with your bidders or implying to them you’re ready to sue at the drop of a hat. That will usually be counter-productive. Just ask for reasonable and fair contract language that protects your interests – you can always say that your architect/designer, insurance agent, lawyer, or contractor friend suggested that one clause or another be revised or added.

If you are putting a job out to bid to several contractors, this is a good time to state the standardized contract you plan to use or specific contract conditions you want all bidders to adhere to. If you are requesting a one-year warranty on workmanship and are requiring that the contractor carry general liability insurance, put this in your bid documents. You may scare off some bidders, but maybe that’s for the best.

If you are working with a formal bidding process administered by an architect or construction manager acting as an owner’s representative, they will most likely use a standard industry contract, usually one from the AIA (American Institute of Architects). AIA has a wide variety of contracts for every type and size of project. In general, they favor the owner over the contractor, and not surprisingly favor the architect as well.

WHICH CONTRACT TO USE

Construction contracts range from a one-page proposal form available at most office-supply stores to 20+ page standardized contracts from the AIA (American Institute of Architects), and other organizations such as AGC (Association of General Contractors).

No contract is entirely neutral. Whoever writes or provides the contract will include some provisions that favor their interests over the other party’s. Some contracts are reasonably even-handed, trying to balance the competing interests of both parties, while some are very one-sided. In some instances, state or federal law may require that certain consumer protections be included – such as the 3-day “right of recision” for home improvements sold to clients door-to-door or by other types of solicitation. Make sure you understand the contract you are signing and can recognize provisions that may unfairly put you at significant risk.

Many contractors have their own favorite contract that they may have adapted from a standard form, or written with the help of a lawyer. They may have pulled it out of one of the many books of construction forms written for contractors or adopted one from an industry association such as the AGC (Association of General Contractors). In general, these contracts protect the interests of the contractor at the expense of the client.

If you are working with an architect or professional construction manager on this phase of the project, he or she will likely choose one of the AIA (American Institute of Architects) contracts. AIA publishes a wide range of contracts, covering nearly any type of construction contract you might enter into. Because the architect is generally hired by the homeowner, and is acting as the homeowner’s representative, AIA contracts tend to favor the homeowner over the contractor, and protect the architect’s interests as well.

STANDARD VS. CUSTOM CONTRACTS

You can use an industry standard contract, as is or revised, or write your own contract with the help of a lawyer. A good place to start for a custom contract is BuildingAdvisor’s Model Construction Agreement, written by a construction attorney to protect homeowners.

Remember, however, that industry standard contracts, such as the AIA forms, have been developed and honed over time. They have been widely used on hundreds or thousands of projects, and their meaning is clear to building professionals and courts. The contract language has been tested in court, so in the unlikely event of a lawsuit, you are assured that the contract will stand up under legal scrutiny. If you stray far from the standard contract language, how it will be interpreted in a court of law is difficult to predict.

Another benefit of using standard contracts, especially if you have an architect or construction manager involved, is that you are distanced from this sometimes uncomfortable aspect of the building process. Let the experts handle the legal mumbo-jumbo and you are free to work with the contractor on a less formal, more friendly basis – focusing on the important thing: getting the building project completed the way you want it.

If your project has special requirements that are not covered by one of the standard contracts, you can adapt one with the help of a lawyer. You may also need a lawyer’s help in states like California, which have a variety of complex and ever-changing laws regulating construction contracts. However, writing a contract from scratch is rarely worth the cost and effort, since you will be reinventing a wheel that has been honed by others over many years and stood the test of time.

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