Construction Contracts
DEAR TIM: I assume you are not an attorney but my guess is that you have a good grasp of contracts. I am getting ready to enter into a contract with a builder. The scope of the project is very large. Is it really worth all the trouble to get an attorney involved? If so, what are some good points and conditions to include in the contract. I want it to be fair to both parties but I also want to be well protected. Hollis B., Columbus, OH
DEAR HOLLIS: Building contracts come in all types and sizes. I know of large scale projects that were completed to the satisfaction of all parties where the contract was a simple one page document. Contracts represent the core of the mutual understanding between a builder and a homeowner. When you boil a building contract down, it should contain clear, crisp language that explains exactly what you are having built, exactly how much the project will cost, and when the job will be done.
You are correct in your assumption with regards to my lack of a license to practice law. As such, I can not offer legal advice. I can advise you, though, that it is very prudent to hire an attorney to review a contract prior to it being signed by either party. Once a contract has been signed by the parties named in the agreement, it is usually very hard to modify the document. A poorly written contract can cost you thousands and thousands of dollars in problems and heartaches. A consultation with a knowledgeable attorney may only cost you several hundred dollars.
Most contracts with builders contain a deposit clause. Deposits don't need to be large. They simply are a way for you to show that you are serious about going through with the project. If possible try to limit this earnest money to no more than $1,000. It is best if it can be held in an escrow or trust account. Large deposits should absolutely be placed in an interest bearing account.
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High quality plans and written specifications take much of the pain out of writing a precise contract. If the plans and specifications contain all of the details of what you want built, the contract, for the most part, simply needs to reference them by their date and the number of pages they contain. By doing this, most attorneys will tell you that the plans and specifications become an integral part of the contract.
Rarely do building projects run smoothly. Homeowners often decide to change their minds for any number of reasons. Some changes can be minor and a builder may make them without any objection or change in price. Contracts should include language that defines those change orders that can cause the price of the contract to rise or fall from the stated amount. This is usually done by stating a minimum dollar amount. These are the material changes that must be in writing. To protect yourself, you can also include a price ceiling for changes. Simply include language that states what the sum total of all changes can be.
The contract must also contain language that outlines deadlines. These should cover start and completion deadlines. Be sure to define what completion means. A Certificate of Occupancy certificate that is issued by the building department does not mean your project is finished, not by a long shot. The contract should address a dead end situation in the event the project never gets started. You should be allowed to back out with no loss of money in this situation.
Be sure there is clear language that outlines inspection rights in the event you want a third party to inspect the quantity and quality of the work. Discuss who carries insurance for the project while it is underway. Make sure the language addressing payments is synchronized with the payment schedule your lender will adhere to. Warranty terms need to be discussed as well.
If you are forced to sign a contract without it being reviewed by an attorney, include a simple contingency clause that gives you three to five days to have it reviewed by your legal counsel. If the builder objects to this clause, you definitely have chosen the wrong person to do business with!
