Summary: Deposit clauses, insurance
warranties and escrow? You'll have to know the following terms and more in order
to write construction contracts. Here is a list of 15 helpful clauses to
know before you sign a construction contract.
15 Helpful Construction Contract Clauses
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Deposit Clause: How much is the deposit? Is it refundable? Who gets it if
the deal goes sour? If the deposit is your lot, who holds title to the lot? If
you transfer it to the builder, it isn't your land anymore!
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Insurance: Who buys and maintains the fire and extended loss while the house
is being built? Does the builder and all of his subs carry adequate Worker's
Compensation? Does the contract say to provide copies of all policies? Does the
builder have adequate general liability coverage? Does it cover mistakes or work
deficiencies that show up during the warranty period? Does the contract state
that you get a copy of his certificate of insurance so you can easily make a
claim?
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Site Inspections: Are you allowed to visit your jobsite to check on progress
and quality? Make it clear. You MUST be allowed to inspect. If it is not allowed
or access severely limited, this is a HUGE Danger Signal.
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Drop Dead Date: What happens if the job doesn't start? Can you get out and
get your deposit back? What happens if the job runs over? Do you get compensated
for extra moving or storage expense?
Change Orders: What is a change order? Can the builder make substitutions on
products and things that do not cost in excess of say $100 without your
approval? Spell out what is and is not a change. What is the absolute MAXIMUM
amount or grand total of all change orders? State it in the contract so you have
cost control.
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Definitions: Define what certain words and phrases mean. Make each word
clear in the contract.
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Payment Clauses: When does the builder get paid? How do you know there will
be enough money at the end of the job to bring in another contractor if your
builder splits? Easy. Get a cost breakdown of the entire job as part of the
contract. Each payment is tied to this breakdown. The builder only gets paid for
work and materials that are in place in accordance with ALL codes and
instructions! He can also get a pro-rata share of his profit and overhead as
long as it is a line item in the cost breakdown.
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Warranty: Define the warranty. What is and is not warranted? What is and is
not a warranty defect?
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Follow the Code: The contract must contain language that all work is
guaranteed to meet the current building codes. These include the general code,
the electrical, plumbing and heating/AC codes as well.
Association Guidelines: The building code is a set of minimum standards.
State that all work must also meet industry association guidelines. Many
associations have extensive literature that is readily available for all
builders to see and follow. It is also easy to understand.
Manufacturers' Specifications: The contract needs to state that the builder
will indeed follow all of the installation guidelines for each product he
installs. What is so hard about that?
Owner's Copy of Manufacturers' Specs: You need a copy of all written
installation instructions for your records. They are easy to obtain. They
usually come with the material when it is shipped. Have a convenient storage
system in place or develop one. This is going to be a hard one, but it is vital
if a defect is discovered later!
Walk Through Inspection: When is it scheduled? It needs to happen several
days or a week before closing. If it is too close to the closing, work WILL not
get done before the closing. All work needs to be done - depending upon weather
conditions - before you close.
Plans and Specifications: Contract states that all work is done in
accordance with the plans and specs. If you have excellent plans and specs, you
are golden!
Escrow: Contract states you have the right to hold back money for unfinished
items including a pro-rata share of builder's profit and overhead. See why the
cost breakdown is so important? Make sure you define who will maintain and
administer the escrow account. If you state the lender, make sure they will do
it.
