RED FLAG CLAUSES

IN THIS ARTICLE
Scope of Work
Quality Standards
Allowances
Insurance
Warranties and Guarantees
Hidden or Changed Conditions
Time is of the Essence and
Liquidated Damages

Change Orders
Match Existing
Substantial Completion
Punchlist & Final Payment

Dispute Resolution                       View all CONTRACT articles

All contracts should clearly identify the contract parties (names, addresses, phone numbers), where the work shall be done, how the cost will be determined, and be signed and dated. Beyond these basics all contracts should address the following issues:

SCOPE OF WORK
From my perspective, this is the most important part of the contract. It consists of the drawn plans, if they exist, plus the written specifications describing the materials to be used and how to install them. When there’s a conflict between the drawn plans and the written specifications, the specs generally override the plans.

Incomplete plans or specs are the source of many disputes. The contractor may have given you a price, but what exactly is he going to do at that price? Without detailed plans and specs, you won’t know until it’s too late that the price did not include painting, or light fixtures, or gutters, or trash removal, or whatever.

Who provides the plans? Construction drawings can hide a lot of sins. Unscrupulous contractors may leave important items out of the plans and specs that they provide, knowing that they will need to add them later as change orders – thereby winning the job with the lowest bid, but maybe ending up the most expensive choice. However, even conscientious contractors (or architects) may inadvertently leave out important, but essential, details, leaving you and the contractor to argue later about what was and wasn’t included in the bid.

Plans provided by an architect or designer may be highly detailed or more artistic and conceptual. The best plans call out important construction details, and often contain specific information about materials and their installation. On the other hand, drawings can be more of an artistic gesture, implying a look that the designer has in mind, but avoiding the messy work of figuring out how to achieve that look with real building materials. In this case it is left up to the contractor to interpret the drawings – or it must be worked out between the architect and contractor if the architect is involved in construction supervision. In any event, fuzzy drawings can lead to fuzzy prices, change orders, and disputes. Best to work out the details before starting construction.

What’s included in the bid? Small repair and remodeling jobs may contain a laundry list of items to be completed but no drawings. That’s fine as long as the list contains sufficient detail. For example: “Contractor to install 6×8-foot walk-in closet with standard-height poles and shelving.” Is the shelving melamine particleboard, vinyl-coated wire, or wood? If it’s wood, what grade and finish? Are the poles wood or metal? One pole along each wall? Floor-to-ceiling shelves or just one or two above each pole? The contractor knows what he has in mind, but just has to take the time to describe it in writing for you. A simple sketch would help as well in this case.

Whether or not the contractor intentionally failed to include, exclude, or mention these costs to the homeowner, the contractor is in a much better position that the average homeowner in anticipating these costs. It’s quite difficult for the average homeowner to know what’s NOT in the scope of work. These can be nuisance items such as cleanup, removing nails from the lawn after a roof tear-off, or providing light bulbs to all new fixtures. Or they may be high-ticket items such as disposal of toxic materials like asbestos, or supplying fill required for grading.

I know a recent new home where the owner was shocked to find out that $10,000 of fill required for final grading was an “extra.” Thousands of dollars in trenching costs for utilities were also tacked on to the final bill.

To avoid these kinds of surprises, ask for a detailed scope of work. Review it and ask questions if anything is unclear. Ask questions like these: How many coats of paint? Do they back-prime? Will there be any additional costs to complete this project? To hook up all the utilities? Is final grading and planting of grass, trees, and shrubs included? Are there any hookup fees, inspection fees, impact fees, or other fees not mentioned?

If in doubt, it may be worth the money to hire an independent construction manager or estimator to review the plans and specs to make sure they cover all the bases.

What’s excluded from the bid? While few contracts include a list of excluded costs, this is a good idea for both the contractor and homeowner. Again, everyone benefits when a job starts out with clear communication and clear expectations by both parties. If the contract does not list exclusions, you can ferret them out with a series of questions. Does the contractor’s bid include:

  • All required cutting and removal of trees and clearing of land required for the project.
  • All excavation and grading costs including cut and fill, removal, and purchase of any required soil and fill materials.
  • Temporary power, sanitation, fencing, and all other site preparation
  • All trenching and backfill required for utilities: water, electric, gas, etc.
  • All plumbing from the well to house, including pump, piping, and pressure tank
  • All work required to comply with the building code
  • Protective finishes on all exterior wood, including pressure-treated decking and trim
  • Final cleaning of the job site and removal of all construction debris
  • Cost and final grading of topsoil, plus any seeding, planting, or other landscaping
  • Testing and removal of hazardous materials, such as lead and asbestos
  • Repair of damage to walkways, yards, roads, etc., on the owner’s property

In Remodeling Projects

Does the contractor’s bid include:

  • Testing or removal of any hazardous materials such as lead or asbestos
  • All required rerouting of plumbing, ductwork, and wiring
  • All moving of furniture, equipment, and supplies required for the job
  • Repair of damage to adjacent rooms, such as cracked plaster
  • Repair of damage to plumbing or mechanical systems caused by tying in to existing systems
  • Repair of damage to existing roadways, walkways, patios, or landscaping by workers or construction equipment
  • Final cleaning of dust and debris brought into the rest of the home

Bottom line. It’s imperative that you start out with an accurate and complete set of plans and specifications. If anything is unclear, ask a lot of questions about what is included and excluded from the bid. Add clarifications to the plans and specifications before you agree to a price.

QUALITY STANDARDS
What contractor does not advertise “quality workmanship” or “fine craftsmanship”? Unfortunately, such claims have little meaning legally or otherwise. If you want high-quality work, hire a contractor with a good reputation, look closely at some recent jobs they have completed, and there’s a good chance your job will look similar. If you want premium work, you can expect to pay somewhat more than you would to the lowest bidder. Some people think that the building code requires work to meet certain quality standards. However, building inspectors are looking only at minimum standards of safety, not the quality of the workmanship. Nor will you get much help from the loan officer at the bank – they will generally approve payment once a phase of work is completed, regardless of the quality of the work.

Beyond that, it’s important to establish some quality standards in the contract, as part of the specifications. This is not addressed in many residential contracts, but is a frequent area of disagreement. One advantage of using a professional architect or construction manager is that they will know the relevant industry specifications to cite for various materials and systems.

Follow manufacturer’s written instructions. An important clause to include in any contract is:

Install all products and materials according to manufacturer’s written instructions and  construction industry standards.

This is important because nearly all manufacturers provide detailed installation instructions for their products and materials. Manufacturers tend to publish stringent standards as they have a strong incentive to have their products installed correctly.

A workmanlike manner. Another phrase that’s worth including is “workmanlike manner,” as in the clause: All work shall be performed in a workmanlike manner.

States vary in their definition of “workmanlike manner,” but most cite something like “how work is customarily done by other contractors in the community.” In court, the opposing parties typically bring in opposing experts who will testify that the work was or was not done in such a manner, depending on who hired them (yet another reason you don’t ever want to go to court!).

To some extent, the term has evolved in the courts and in some state statutes to a slightly higher standard of “using the degree of skill, efficiency and knowledge that is possessed by those of ordinary skill, competency, and standing in the particular trade for which the contractor is employed.”

This still leaves room for argument. Nonetheless the phrase gives you a leg to stand on, especially if the contractor’s work was clearly substandard.

Construction industry standards. In addition to manufacturer’s instructions, many construction products have widely accepted industry standards published by trade associations or standards-writing organizations such as ASTM (see list of trade associations). For example, you can find extensive standards and guidelines for concrete, drywall, roofing, wood siding, and many other building materials. These standards tend to be rigorous as the trade associations, in general, are working to improve the quality and reputation of their industry.

Building industry organizations such as the National Association of Homebuilders (NAHB) also publish quality standards in an effort to professionalize the industry. While these are minimum standards, they offer a useful starting point for establishing objective measures of quality. Learn more about NAHB’s quality standards.

Bottom line: Look for a contractor with a reputation for quality workmanship and for taking care of problems that show up after the job is complete. Written quality standards can also help. They do not guarantee high-quality work, but if well written, they give you a leg to stand on in a dispute over substandard work.

ALLOWANCES
A large building project requires hundreds of decisions, big and small. Many involve choosing products and materials, especially fixtures and finish materials such as paint, carpeting, tile, bathroom fixtures, cabinets and counters, electrical fixtures, towel racks, toilet paper dispensers, and on and on. Some people find this a delightful challenge; for others it’s a nightmare of too many choices and not enough time. You can find tips on choosing colors and finishes in the Design section.

A well-organized contractor will assign you deadlines for making these decisions, and may provide you with samples and color charts – or at least direct you to retailers with whom they commonly do business.

Often, the choices are not known at the time a job is bid, so the contractor puts in an estimate of the cost, called an “allowance.” For example, the bid might include material allowances of $6,000 for kitchen cabinets and countertops, $15 per sq. yd., for carpeting, and $5 per sq. ft. for ceramic tile. Some contractors will also add markup to the allowance, under the notion that they are assuming higher risk and greater difficulty when installing high-end products.

If your contractor priced the job, allowing $5,000 for “builder-grade” cabinets and Formica counters, but you had in mind solid cherry and granite, you will probably not be happy to discover that the real cost of cabinets and counters is $15,000. Similarly, carpeting can range from under $10 per yard to over $40. Ceramic tile can range from $1 per sq. ft. at a home center to well over $10 per sq. ft. for high-end products.

Allowances are also sometimes used for unknowns such as well drilling or removal of underground ledge. You will be quoted an estimate based on a best guess, with the actual price based on the depth of the well or cubic feet of ledge removed.

A conscientious contractor will put in realistic allowances, in line with the quality of construction and overall budget of your project. To prevent unpleasant surprises, do research up front on realistic prices for the products you plan to use. If you are looking at competing bids, compare the allowance figures – low-balling allowances is an old trick to make a bid look attractive. Whenever possible, make selections before the bidding process so you will get real prices, not guesstimates. By all means, avoid using allowances on high-ticket items such as windows. The cost difference between “builder-grade” windows and premium windows can be thousands of dollars for a house or addition.

With regard to well drilling, ledge removal, and other high-ticket items, ask whether the contractor will do the job for a guaranteed price. You will pay more than the allowance for the security of a fixed price, but it might be worth it to you.

Bottom line. Allowances are a necessary evil. Make sure that the allowances in a contractor’s bid are realistic. To the extent possible, make selections for big-ticket items like doors and windows, kitchen cabinets, and bathroom fixtures before soliciting bids.

INSURANCE:  LIABILITY, WORKERS’ COMP, and BUILDERS’ RISK
By their nature, construction projects carry a fair amount of risk – among other things, you’ve got big trucks and power tools that can cause damage, heavy objects that can fall, workers who can fall from rooftops and stagings, and partially built spaces full of danger and attractive to kids. There are three main kinds of risks, each covered by a separate type of insurance. If the contractor is not properly insured, the homeowner can be held liable for any of these risks.

CONSTRUCTION RISKS & INSURANCE

Type of Risk Insurance Type Who Carries?
Harm to people (non-workers) or property caused by the construction project General Liability Contractor, typically
Injury to workers Worker’s Compensation Contractors and Subcontractors with employees
Damage to the building or materials, during construction from fire, wind, theft, etc. Builder’s Risk or Course of Construction (may be covered by Homeowners Insurance in renovations) Homeowner, typically

The contract should require that the contractor carry General Liability insurance with you as an “additional insured” for the duration of the project. This protects your home, family, and others from harm caused by the construction process, like a worker’s hammer dropped on your car or your head.

The contract should also require the contractor to carry Worker’s Compensation insurance for all employees. Otherwise, you will be liable for injury to workers. Although this coverage is required by law, it is expensive insurance and some contractors do not carry it. In addition, your contractor should require that his subcontractors provide him with their proof of insurance.
Finally, you (or your contractor) should carry Builder’s Risk insurance, which covers damage to the building or materials during construction. On a renovation project, this may already be covered by your homeowners insurance or can be added as an endorsement. On a new home, you may be able to get a policy that converts to homeowners insurance upon completion of the project.

Lenders will typically require all these insurances, but you will want them regardless, along with proper documentation of coverage. For example, AIA A105 states that “Each party shall provide certificates of insurance showing their respective coverages prior to commencement of the Work.” Again, the contractor should also require his subcontractors to provide him with proof of their insurance, naming the contractor as an “additional insured.”

Indemnification. Many contracts carry indemnification or “hold harmless” clauses that essentially state that one party will not sue the other in the event of a loss. An indemnification clause may further try to protect you from third parties who are harmed and go after you, rather than the contractor. People try to write indemnification clauses as broadly as possible in an attempt to protect themselves from liability. These do not always hold up in court, but may protect you from a lawsuit if, for example, the contractor is uninsured or underinsured, and decides to sue you for damages or injury that occur during a project. These can get pretty verbose and technical. For example, the Indemnification clause in the AIA A105 (the short-form contract) reads:

8.12 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Architect’s consultants and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claims, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder.

Bottom line. Construction is risky business, so make sure you and your contractor are properly insured. In general, you, the owner, will be held liable for all claims if the contractor does not carry the proper insurances. When in doubt, ask your lawyer for advice.

WARRANTIES and GUARANTEES
Warranties are important since defects in construction often don’t show up until well after the last check has cleared. Common ones include drywall cracks and nail pops, concrete and tile cracks, lumps in the carpeting, sticking doors and windows, and leaky flashings, to name a few. Yet another reason to work with a reputable contractor is that he is more likely to honor the warranty and return to fix things, even after the typical one-year warranty has expired.

The terms warranty and guarantee are often used interchangeably and have the same meaning legally. However, as commonly used in construction law:

  • A warranty is a written promise (or guarantee) by the manufacturer or contractor to repair or replace a defective product or correct defective workmanship. Most warranties have time limits and other restrictions (limited warranty).
  • A guarantee is a more general term, referring to any promise by a manufacturer or contractor that a product or service will be free from defects.

A warranty can be “express” and written into a contract or “implied” by federal or state laws. For example an Implied Warranty of Merchantability is part of the UCC (Uniform Commercial Code), which is adopted by most states. A warranty of merchantability guarantees that a product conforms to ordinary standards of care as similar goods and that it is fit for the ordinary purposes for which it is used. For example, a garage door that does not open, a chimney that does not vent properly, or a deck that wobbles would most likely not meet this standard, allowing the owner to sue, if it came to that.

Most guarantees and warranties are limited for a period of time, are non-transferrable, and most have exclusions that, in some cases, render the promise pretty useless. For example, many building product warranties are for the materials only and some further limit their exposure by using a prorated value. Many roofing warranties follow this pattern – so, if your “30-year roofing” fails in 10 years, you may get 50% of the cost of the shingles, and nothing for the labor to install them. Since labor accounts for about two-thirds of the cost of replacement, you may end up with $1,000 toward a $7,000 roofing job.

We just called a window manufacturer about two large 10-year-old windows that had “fogged” due to broken seals. The windows were guaranteed for 20 years, but the seals only for 10. And even if they were still under warranty, it would cover only the materials. The cost to remove the sash, install the new glass, and replace the sash was not covered. The same is often true for paints and coatings, and a variety of finish materials.

Since it’s not always clear whether a problem is caused by the product or its installation, and given the limitations of most manufacturers’ warranties, it’s in your best interest to have the contractor’s warranty cover both materials and installation. Since the contractor purchased the materials, it should be his responsibility to negotiate with his suppliers, manufacturers, or subcontractors over warranty issues. He also has much more leverage than you with a manufacturer’s rep or subcontractor.

The general contractor’s warranty should also cover all subcontractors’ work, since the contractor hires them, supervises their work, and has a contractual relationship with them. Also, in some cases, it’s unclear which subcontractor caused a problem. Were cracks in the drywall caused by the framing contractor or the drywall installers? It shouldn’t be your problem to figure this out. Plus, your contractual relationship is with the general contractor, not the subs.

Look for at least a one-year warranty on all products and materials installed by the contractor. Most contractors will exclude work or materials provided by the owner or by workers hired independently by the owner (my cousin the plumber), which is a reasonable limitation.
The AIA105 (short-form) Warranty clause reads:

8.5 The Contractor warrants to the Owner and Architect that: (1) materials and equipment furnished under the Contract will be new and of good quality unless otherwise required or permitted by the Contract Documents; (2) the Work will be free from defects not inherent in the quality required or permitted; and (3) the Work will conform to the requirements of the Contract Documents.

Extended warranties. In many cases, products come with warranties that extend for 10 years or more, well beyond the contractor’s one-year warranty. So when roofing shingles blow off or windows fog up five years after completion, you are left to deal with the manufacturer on your own. This is where the “weasel words” in small print will usually get you. Common limitations are that the manufacturer is responsible for materials only, and those may be further limited by prorating. It’s like a car manufacturer mailing you an engine part that fails – but you have to rip the engine apart to install it.

In addition, the warranty on most products becomes void if the installer did not follow the manufacturer’s instructions. If your contract included the clause that the contractor was to “Install all products and materials according to manufacturer’s written instructions,” then you may have a leg to stand on if you are denied coverage for that reason. For example, many roofing shingles require felt paper, or equivalent, to be installed under the shingles (a good idea, whether required or not). If your contractor skipped that step and the shingles prematurely buckled and cracked, you would have a strong case to have the original contractor re-do the job at no cost to you.

In some cases, it’s clear-cut that the installer did not follow the instructions. For example, if a roofing shingle requires a vent space below and there is none, then the designer or contractor is at fault. If the exterior trim required that all cut edges be sealed and painted, it should be easy to determine. However, it’s often not clear cut. Was it over 50°F when the paint or adhesive was applied? Was the paint applied to wet wood or below the recommended temperature?

Warranty procedures. Even though warranties cannot completely ensure that problems will be fairly addressed, you should do everything you can to properly support your claim. That is, make sure you keep the warranties organized and in a safe place, document the dates that the product or material was purchased, installed, and put into use. Pay special attention to high-cost items  such as windows, heating and cooling equipment, major appliances, synthetic and composite products (decking, siding, exterior trim), bathtubs and showers, and roof shingles – all products that I’ve seen fail over the years.
Read the fine print and take any necessary steps to keep the warranty valid, such as:

In order to qualify for the benefits under and thereby validate this warranty, the original purchaser  must fully complete the attached certificate of registration and mail it to AAA Products Corporation, 100 Main St, Anywhere USA, within thirty (30) days from date of original purchase.

In the event of a problem, document it right away with date-stamped photos, and send a letter to the contractor and/or the supplier or manufacturer, depending on the item and time frame, and keep a copy for your files. It’s always best to start with the contractor, even if the contractor’s warranty period is over. A conscientious contractor will want to know if there are problems with his workmanship or products he has installed, whether or not he is responsible. Even if his warranty has expired, he may choose to help out in the interest of providing good customer service (and getting more work and referrals from you). If it is a product problem, he may have an ongoing relationship with the supplier or regional manufacturer’s rep that can be a great help in reaching a satisfactory outcome.

Bottom line: Warranties can be useful in some circumstances, but often fail to provide true compensation for defects. As the old saying goes, warranties are only as good as the people who make them. The best guarantee that products will perform as planned is to buy quality products with a known track record from a company known to stand behind its products, and then have them installed by a competent, conscientious contractor. You’ll have far fewer problems and a greater likelihood of getting help and satisfaction from suppliers and installers if things do fail over time.

HIDDEN or CHANGED CONDITIONS
Nobody likes surprises in construction work, because they almost always increase costs. Who pays for job-site surprises, things unanticipated by the owner, architect, or contractor, is often a bone of contention. In new construction, this might be subsurface conditions such as ledge or large boulders that must be removed. In remodeling, it could mean rotted or insect-damaged framing, foundation problems, the presence of toxic materials such as lead, asbestos, or radon, or any number of things that lurk behind walls and ceilings.

Common hidden conditions include pipes or wires that are in unexpected places, damaged, or obsolete and need to be relocated or replaced. In other cases, expected components are missing:  a necessary vent pipe, beam, or other building component was never installed or was removed at some point. I’ve seen more than one home held up by a wing and a prayer, rather than a proper structural frame (this is possible because all buildings are engineered with a large safety factor, so they tend to sag over the years rather than collapse).
There is some overlap in meaning, but in general the term “changed conditions” refers to job-site conditions that are different from what’s in the plans and specs, while “hidden” or “concealed” conditions are those that are hidden from sight and not obvious. Hidden conditions are especially common in renovations, since most of the structure is hidden from view. Changed conditions may reflect an error or omission in the plans that ends up adding costs to the project.

Most contractor agreements have a “hidden,” “concealed,” or “changed” conditions clause, which attempts to pass those costs to the homeowner. From the contractor’s perspective, why should he have to pay for things that were not indicated on the plans and could not have been reasonably anticipated? Owners, on the other hand, tend to think that the contractor should have known about these problems based on his experience and site investigations.

With no such clause in the contract, courts have generally supported owners as long as they did not willfully withhold information about the job. If you know that the foundation is settling and that you share the house with a termite colony, you must disclose this. Courts have generally ruled that contractors are responsible for what they should have known had they done a thorough job inspection, following customary trade practices. Even with a hidden or changed conditions clause, courts may rule against a contractor who should have discovered the problem with a reasonably thorough site inspection before bidding.

Still some contracts try to place on the owner all responsibility for changed or hidden conditions. This is unfair since some problems should have been anticipated by a professional contractor who made a reasonable effort to inspect the plans and building site. Avoid a contract with blanket language such as:

Any work not indicated in the plans or specifications, that must be added, repaired, or replaced as a result of hidden, concealed, or changed conditions, or that is required for compliance with building codes or other regulations, shall result in a change order, and shall be paid for in full by the Owner, subject to the terms and conditions of this contract.

More owner-friendly (and architect-friendly) contracts like the AIA contracts, place at least some of the burden on the contractor to carefully review all plans and to carefully examine the job site before bidding.

For example AIA’s short-form contract A105 reads as follows below. Keep in mind that if you provide the plans, and no architect is involved at this point, you can substitute “Owner” for “Architect”:

10.3 If concealed or unknown physical conditions are encountered at the site that differ materially from those indicated in the Contract Documents or from those conditions ordinarily found to exist, the Contract Sum and Contract Time shall be subject to equitable adjustment.

8.1.1 Execution of the Contract by the Contractor is a representation that the Contractor has visited the site, become familiar with local conditions under which the Work is to be performed and correlated personal observations with requirements of the Contract Documents.

8.1.2 The Contractor shall carefully study and compare the Contract Documents with each other and with information furnished by the Owner. Before commencing activities, the Contractor shall (1) take field measurements and verify field conditions; (2) carefully compare this and other information known to the Contractor with the Contract Documents; and (3) promptly report errors, inconsistencies or omissions discovered to the Architect.

NOTE: This is why you’ll often see “Contractor to verify all measurements on site” stamped on most construction drawings.

The contractor’s duty to verify field conditions places a greater burden on him to examine the job site and makes it more difficult for him to pass on costs to the homeowner. In my own experience, there is usually visible evidence of rotten or bug-infested framing that is apparent to a competent building professional. Similarly, in new construction, there is usually evidence of subsurface water problems or subsurface ledge, but the extent of the problem may not be easy to determine.

If problems are suspected, it is worthwhile to tear down some plaster or drywall to get a better look, or make additional test borings to assess subsurface conditions. Then you will be in a better position to negotiate a fixed price, or at least an allowance, prior to construction. For example, the contract may refer to the presence of ledge and provide an allowance, based on X dollars per cubic yard of ledge removed. With rotted framing, the estimate could contain a best guess of the cost to replace, with a similar allowance based on the amount of wood replaced, perhaps with a guaranteed maximum. Anything you can do to nail down costs or at least set some reasonable limits will help you control costs and help avoid disputes.

Bottom line: Minimize surprises and conflicts by doing the extra work needed up front to identify potential “hidden” problems. Use contract language that makes the contractor responsible for verifying field measurements and conditions, so the burden of hidden conditions is shared fairly by both parties.

TIME IS OF THE ESSENCE and LIQUIDATED DAMAGES
A “time is of the essence” clause indicates that the completion date (or job duration) specified in the contract is really, really important, and that if the contractor misses that date, it is treated as material breach of the contract. Basically, that means that the owner can sue the contractor for damages if the job is not finished on time, although courts do not always enforce these clauses if they are seen as unfair. It doesn’t hurt to have a “time is of the essence” clause to communicate how important the completion date is to you. However, since the last thing you want to do is sue anyone, a “time is of the essence” clause may not prove that useful in practice.

If the completion date is truly critical to you (for example, you have sold your house and need to move by a certain date or check into a motel), then you may be better off with a liquidated damages clause. In this case, the contract stipulates a specific sum for each day that the job is delayed, excluding delays caused by the owner. If you add such a clause, make sure that the amount is reasonable – say the cost of your motel room plus storage and extra moving fees – or the clause may not hold up in court.

Also, expect to pay more for a job with this sort of hammer held over the contractor’s head. He is taking on a lot of risk and may have to hire extra people or pay overtime charges to finish up on time. Just as most construction jobs cost more than originally budgeted, most end at least a little bit later than planned – whether due to bad weather, material delays, or overly optimistic scheduling by the contractor.

Bottom line. Consider using a liquidated damages clause if the completion date is critical to you. However, don’t ask for an unreasonable amount of money – and expect to pay extra for adding this requirement to the contract.

CHANGE ORDERS
Much has been written about change orders as they are often a source of conflict – especially in commercial and government contracts where these can be a major source of profit for contractors, who bid low and then make their money on change orders. However, they also may be a source of conflict on residential jobs.

Contractors tell horror stories about the customer who comes to the work site every day with a new idea, or the one who wants the contractor to price every option, this way and that, after the job has begun.

Owners, on the other hand, tell horror stories about the contractor who nickel-and-dimed them to death with change orders every time they asked for the smallest change or just wanted something to be done correctly.

Contractors have a valid point when they say that changes to the plan, after construction has begun, can be expensive and inefficient, and will lead to delays in the completion date. They have a legitimate right to charge a reasonable fee for changes and to reset the completion date, based on the extent of the changes. However, it’s unreasonable to charge for minor changes that do not cost extra or cause delays.

The best way to avoid conflicts over change orders is to start with a good set of plans and specs, and minimize changes after construction has begun. If you are not good at visualizing 3-dimensional space from a set of blueprints, then the 3-D software now widely used can help you walk though a space before you build to make sure it is what you want. Still, you may discover after the framing is complete that a space is a little too narrow, or a view out a window would be a lot nicer if the window were moved over a foot or two. Speak up now, before the plumbing, wiring, insulation, and Sheetrock make it really expensive to move things around.

If you have found a good contractor who believes in fairness and give-and-take, his cost to make the change at this point shouldn’t be too much. This is yet another reason to hire a contractor with a strong reputation for quality and good customer relations.

As for the specifics of the change order clause, the AIA short form A105, seems fair and reasonable:

10.1 The Owner, without invalidating the Contract, may order changes in the Work within the general scope of the Contract consisting of additions, deletions or other revisions, the Contract Sum and Contract Time being adjusted accordingly in writing. If the Owner and Contractor cannot agree to a change in the Contract Sum, the Owner shall pay the Contractor actual cost plus reasonable overhead and profit.

10.2 The Architect will have authority to order minor changes in the Work not involving changes in the Contract Sum or the Contract Time and not inconsistent with the intent of the Contract Documents. Such orders shall be in writing and shall be binding on the Owner and Contractor. The Contractor shall carry out such orders promptly.

Bottom line: Make sure you’re happy with the plan before you start building. It’s very cheap to change a line on a drawing before soliciting bids. It’s not too expensive to move things around at the framing stage. It’s usually very expensive to move things around when the building is nearing completion.

MATCH EXISTING
These words appear in the plans or specs for many remodeling jobs, in which the owner or designer wants the new work to blend in with the existing structure. The phrase may be applied to the color or texture of roofing, stucco, siding, plaster, flooring, or just about any material. Or it may refer to the shape of a molding or other piece of woodwork.

If you’ve ever tried to “match existing” yourself, then you know how difficult this can be. Modern, computerized paint matching systems, available at almost any paint store today, have solved the problem pretty well for paint. However, all materials fade (or darken) over time, and some materials are simply no longer available, so an exact match is impossible – or very expensive as it would involve custom fabrication of that molding, door, or whatever it is you are trying to match. And even if the exact same material is available, it will probably not match until it has weathered or faded over time.

Contractors try to deal with this by putting various disclaimers in their contracts, or procedures for having the owner or architect approve the match. The disclaimers usually state that the contractor will make his best effort to match, but that an exact match is often not possible. It may go on to state that there will be an extra charge for special-order or custom work if stock materials are not acceptable. Some contracts include a procedure for submitting the matching material to the owner or architect for approval, giving the contractor final say if nothing is approved after a good-faith effort on his part.

As an owner, I would like the contract to state that “Contractor is to match the existing roofing to the owner’s satisfaction.” However, as a former contractor, I wouldn’t expect a perfect match, so I’m a pretty easy customer in this regard.

This is an area that requires a reasonable attitude and give-and-take on both sides. For renovations, hire a contractor with a lot of experience in remodeling, as this involves a different skill set than new construction. Discuss your expectations up front, look at some samples, and work out a mutually acceptable solution.

Square and level. This is a special type of matching required in remodeling work, especially on older homes. In general, it’s a bad idea to connect something square and level to an old building that has sagged and sloped. You’ll end up with an awkward place to trip on the floor or an unsightly seam on the wall. A skilled remodeler will do his best to fudge the connection and blend things together. The contract may call this out in the contract with a disclaimer that the new work may need to be out of level to match the existing. Again, hire an experienced contractor with a good track record on similar jobs and you’ll probably be happy with the results.

Bottom line. In remodeling, a perfect match to existing materials is not always possible. Find a good contractor with extensive experience in renovations and work out an acceptable match. The contract should require that matches be approved by the owner (or architect).

SUBSTANTIAL COMPLETION, PUNCH LISTS & FINAL PAYMENT
Substantial completion is generally defined as when the project is “sufficiently complete in accordance with the contract documents so the owner can occupy or utilize the work for its intended use.” The contractor usually receives the final large payment upon substantial completion, minus enough to cover any punch list items. Substantial completion is also the trigger for other clauses such as liquidated damages and the contractor’s warranty period. However, when exactly substantial completion occurs is a gray area. Touch-up painting, a missing interior door knob, or a couple of missing heating grilles are clearly punch list items. But what if one bathroom is fully functional, but one is waiting for back-ordered fixtures? What if some interior doors are missing? Or a skylight is leaking and waiting for repair or replacement? These are all typical sources of disagreement.

This is an especially tricky time in a building project, since the contractor is anxious to get the last big check, while the owner is reluctant to pay in full with a lot of loose ends still remaining. Obtaining a certificate of occupancy (not a provisional one) is an important milestone – since without it, you cannot use the space as planned. Therefore, I recommend making a certificate of occupancy (CO) a requirement of substantial completion. If an architect is involved, he will certify when the building is substantially complete and “in accordance with the contract documents.”

If you are on your own, you will have to mutually agree with the contractor on when the project is substantially complete.  You will want to do a walk-through and thorough inspection before making a decision. You should first do a walk-through on your own with your spouse or friend (someone who knows a bit about construction would help) and prepare a punch list, listing items that need fixing or completion. The contractor should also come prepared with his own punch list. Then walk through together to come up with a comprehensive list of loose ends that need tying up. For example, some doors and windows might be sticking and need adjustment, a cracked tile may need to be replaced, a few pieces of wood siding may be cracked or cupped and need replacement, and so on. If anything substantial is incomplete or needs major repair, it does not belong on the punch list but should be completed before the final large payment.

The contractor will then give you a cost estimate for the items on the punch list. It is common to hold back 200% of the value of the punch list items, under the theory that if the contractor does not complete them, you can hire another contractor. Of course another contractor may charge a lot more than your contractor is allocating to do that work. To guard against the contractor undervaluing the punch list work, and to provide an incentive for him to get the work done in a timely manner, it’s best to hold back a bit more. Depending on the size of the job, you might want to hold back more than 200% of the punch list value, or 200%  plus a fixed amount based on the size of the job, ranging from $1,000 to $5,000. Sample punch list language might read:

A written list of uncompleted work for the Project (the Punch List) shall be established and agreed to by the Contractor and Owner (or Owner’s Representative). The Punch List may be amended from time to time, upon written Agreement of the Parties, prior to Final Completion. The Punch List shall include all deliverables through Final Completion in accordance with the contract documents. The Owner shall hold back two times the estimated value of the Punch List items agreed to by the Parties, plus a fee of $_______. Owner shall pay the Contractor the full amount held back upon completion of all items on the Punch List.

DISPUTE RESOLUTION
In all my years as both a contractor as well as an owner hiring contractors to build or remodel my own homes, I am thankful to say that I have never ended up in court or even had to threaten a lawsuit. However, I frequently heard from other contractors that they had been “stiffed” (i.e., not paid) for work completed. And I have heard about my share of building and remodeling nightmares from unhappy homeowners. Conflicts are often the result of different expectations on the parts of the two parties rather than bad intentions – so good communication up front is the best way to avoid disputes.

Documentation. If there is a significant problem with the job that you feel is not getting resolved quickly, it’s important to document the problem early and thoroughly. Take lots of photos, document any relevant product information (e.g., which adhesive was used to bond the tiles to which material), and write as detailed a description of the problem as you can. Since you will probably not know what conditions are most relevant, record as much as you can about the temperature, weather, and other factors when the work was done. For example, were the roof trusses lying on the ground in a messy pile in the rain for a week before installation? Without this sort of documentation, it will be difficult for you to prove that the problem resulted from substandard workmanship.

Even with documentation, it will be difficult to prove that the work was “defective,” rather than just of poor quality. This usually involves hiring expensive expert witnesses to testify against other hired guns paid to say the opposite.

Try to work it out. I can’t say that I’ve been 100% satisfied with every job I’ve contracted out, but I have managed to work things out with the tradesperson or contractor. There’s a strong incentive to do this: calling your lawyer is expensive – you can almost hear the clock ticking and the dollars adding up. And going all the way to court typically costs $30,000 and up, so it’s rarely a practical or economical approach to settling disputes in residential construction. In addition to the money, it’s a slow, painful, and generally miserable process.

One positive consequence of the pain and cost associated with lawsuits is that most lawsuits are settled out of court. At some point, you make the calculation that it is better to accept a compromise than to spend tens of thousands of dollars in the hope that you will win the jackpot – most of which goes to your lawyer anyway. In some cases, you may be able to collect attorney’s fees if you prevail, but most people have better things to do with their time than attend depositions and hearings. While people tend to sue because they are angry and want to make the other party pay, it’s best to think of a lawsuit as a business activity — money invested in the hope of a good return. You’ll usually conclude that it’s a lousy investment.

Which brings me to the dispute resolution clause. If things get to the point where you simply can’t work out a compromise or mutually acceptable solution, there are three main options: mediation, arbitration, or litigation. If things are going so badly that you are considering litigation, it’s best to talk to a lawyer about your options, including firing the contractor for breach of contract. The three main approaches to dispute resolution are discussed below:

Mediation. Mediation is an informal and non-binding process oriented toward working out an agreeable compromise. Things said in the session are confidential and cannot be used against you in court. It’s best to work with a mediator with experience in residential construction. A contract can call for mediation first, and specify that if that fails, the dispute goes to binding arbitration or civil court. While mediation often fails to reach its goal, it may be worth a try as it is quick and inexpensive, compared to the alternatives.

Binding arbitration vs. litigation. Arbitration is the method of dispute resolution specified in most residential construction contracts. In general, this is faster and less expensive than civil litigation. However, it can still take several months and cost thousands of dollars in legal fees. A lawsuit, by contrast, will usually drag on for one to two years or more and cost tens of thousands of dollars. Most people are represented by a lawyer in an arbitration hearing. The decision of the arbitrator is binding and the right to appeal is very limited. Often arbitrators have expertise in construction and they are more likely to split the difference than a judge and jury. It’s important that the contract clause regarding arbitration be consistent with state law. Some arbitration clauses specify that the proceedings will be administered by the American Arbitration Association, a good source of information on the process. An arbitration clause may state that:

Any claim or dispute arising out of or relating to this contract, or breach thereof, shall be decided by binding arbitration in accordance with state law, and judgement on the award rendered by the arbitrator(s) may be entered into any court having jurisdiction thereof.

Small claims court. Each state has its own procedures and dollar limits for small claims court – ranging from $2,500 to $15,000 in a couple of states. For many states, the maximum amount of damages ranges from $5,000 to $10,000. In general, the parties represent themselves in small claims court in a fairly informal hearing. They may get a little coaching from a lawyer in how best to prepare for the hearing, but paying a lawyer to represent you would not be worth it for the amount of money involved. Also the proceedings are informal, making it very feasible to represent yourself. In most states, you can appeal a judgement in small claims court under certain conditions within 30 days of the original hearing.

Collecting the money. Even if you win a case in arbitration or court, you still have to collect the money. If the other party does not pay up, you may need to have your lawyer pursue collection actions such as garnishing wages or a bank account. What if the contractor has declared bankruptcy by then, or started a new company under another name, or moved to another state or just wants to be difficult? Yet more reasons to try to resolve things peacefully.

Bottom line. Arbitration or litigation should always be your last resort. As is often said, the only people who really benefit from most lawsuits are the lawyers. Most experts recommend arbitration over civil litigation in residential construction disputes. Either way, your contract should contain a disputes clause describing how disputes should be handled if all else fails.

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Comments

  1. northernbuilder,esq says:

    The information provided in the “Hidden or Changed Conditions” narrative above is valid with respect to how disputes arising from hidden or changed conditions are typically dealt with in the industry. However, the 1918 United States Supreme Court decision to United States v. Spearin (248 U.S. 132), also known as the Spearin doctrine, states that the owner is liable for conditions that could not reasonably known by the contractor as an implied warranty of the construction documents. Clauses requiring the contractor to visit the site, check the plans, field verify, etc. do not relieve the owner from liability of incomplete/incorrect information in the construction documents or conditions that could not reasonably be anticipated by the contractor, and are thus considered erroneous statements in the documents with limited merit.

  2. cwanderson says:

    The information above was/is very nicely presented. It was well worth the small time spent reviewing especially the RED FLAGS, as I about to assemble and sign a contract for a medium renovation project. I also appreciate northernbuilder’s contribution. Thanks

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