Once you’ve selected a contractor, then the next step is to prepare and sign a contract. Like any formal legal agreement, the contract should protect the rights and concerns of both parties while clearly specifying the scope and limitations of the work to be done. A good source for contracts is at the website for the American Institute of Architects (www.aia.org) which contains free downloadable standard forms for contractors and owners.
There are several types of contracts and you should choose the one that fits you best. The “lump sum” contract gives the general contractor an agreed upon fixed amount over the life of the project. This has the advantage of locking in a given amount, but it might be high to begin with. This works well for simple remodeling projects. The typical contract is the “cost-plus” or “time-and-materials” contract where you pay the contractor the cost for labor and materials plus a percentage (anywhere from 10% to 25%) of that cost.
Tips For Avoiding Traps In Contractor Contracts
The Contract Should Specify The Schedule Of The Construction
The contract should specify not only the start and end dates of construction, but also dates of completion of significant stages in the building process. This protects the owner in case work slips behind schedule. You can divide payments by month, but this doesn’t insure that work stays current. It’s better to link payments to the completion of milestones in the building: site preparation, excavation, pouring foundation, framing, roofing, exterior finish, masonry, insulation, electrical, plumbing, HVAC, windows and doors, interior trim and cabinetry, clean-up, and landscaping.
A Deposit Is Required For The Contractor Before The Construction Begins
It’s customary for the contractor to require a deposit before building begins. The deposit may only cover cost of materials that the contractor has to pre-order, but it is also reasonable to expect to pay anywhere from a quarter to a third of the total price of the job up front. Some states limit the percentage of the total cost of the house that a contractor can ask for as a deposit.
The Contract Should State All The Warranties And The Details
Warranties in contracts must specify exactly what is covered: time, materials, workmanship, and any limitations that apply to the materials or work. The contract should specify third-party dealers who offer warranties on their products, and you should receive those written warranties once the work is done.
The Contract Should Discuss Methods Of Dispute During Grievance
The contract should also discuss methods of dispute resolution in case either party has a grievance. Typically, because both parties want problems solved, dispute clauses rarely need to be invoked. If, however, disagreement reaches an impasse, then the contract can serve as an aid in resolving the issue. Third-party arbitration is the usual recommendation for dispute resolution clauses—once standard legal means have been exhausted—and must be carefully worded to comply with state and federal laws and guidelines. It’s wise also to specifically agree to a third-party arbitrator in the contract before any grievance arises. As with warranties, time limitations on dispute resolution should be specified, so make sure you are comfortable with the amount of time you are given to resolve disputed claims.
Conduct The Negotiations Yourself
Although some contractors might present contractual terms as written in stone, anything and everything is negotiable. It’s a mistake, however, to conduct these negotiations on your own. A good real estate lawyer familiar with building and remodeling contracts should review the terms and advocate for the best possible contract for you and your family. It is not an adversarial relationship you want with a general contractor, but you must be sure you cover every detail for which you might be held legally and financially responsible. If you are presented with a contract by the contractor, be sure your lawyer reviews it.
Make Sure Some Terms Are Included In The Contract
Other terms you should make sure are included in any home building contract are (1) right of rescission, where you have three days from the signing of the contract to void the contract, i.e., back out if you get cold feet for any reason; (2) mention of all applicable permits that must be bought and held by the contractor—including a use or zoning permit that specifies what kind of work is allowed on the property, building permit, electrical permit, septic permit, plumbing permit, and possibly even a grading permit; (3) a statement saying that the contractor must hold all licenses for performing the type of work specified in the contract, both local and state licenses; and (4) a statement that the contractor must carry adequate insurance for the duration and nature of the job. Some of the types of insurance the contractor are usually required to carry are workman’s compensation, general liability, and even business automobile insurance to cover damage to worker’s vehicles on your property. A certificate of insurance must come directly from the insurance company to you and not from the contractor. It is your responsibility to contact the contractor’s insurer and have them send the certificate to you. Also, you should review your own insurance situation to make sure you are covered for any accidents that might occur on your property.
Include A Clause Protecting You Against Liens On Your Property
To protect yourself to a further extent, you might want to include in the contract a clause protecting you against liens on your property. If for some reason the general contractor fails to pay one of the sub-contractors, then that sub-contractor can legally place a lien on your property. The contract can state that lien waivers will be signed by each contractor, sub-contractor, and supplier, at each stage of completion and payment, so that you can see that everyone has been paid and that no lien might be placed against you in the future. The lien waivers are separate documents that would be the responsibility of the general contractor to have completed, signed, and returned to you.
The Contract Should State Clearly How Change Orders Would Carry Out
Finally, the contract must specify how “change orders” are to be carried out. Change orders are any changes, additions, or deletions that occur during construction. As you can imagine, this is a fairly common occurrence in building and remodeling. The nature of building requires common-sense decisions to be made at every step of the process, but sometimes these changes must be discussed and added to the contract. A change order is how this is done and it must be specified in the original contract how these are to be agreed upon.
Once the job is done, it’s customary for the owner to sign a “completion certificate” verifying that the job has been completed according to the agreed-upon plans, specifications, and cost, as originally stated in the contract. Before signing the completion certificate make sure (1) all work has been completed to your satisfaction and you have carefully inspected the work, (2) you have been given written proof that all sub-contractors have been paid, (3) the job site is clean, (4) you have been given all written warranties that cover workmanship and materials, and (5) that, if relevant, the contractor has given you a “certificate of occupancy” allowing you and your family to safely move into the home.
If for some reason you have a complaint that cannot be resolved by discussion, mediation, legal means, or third-party arbitration, you may still take your issue to a state or local consumer protection office, a local builder’s association, or the Better Business Bureau. However, any good general contractor knows that for his business to be successful, he must maintain a solid list of satisfied customers. It’s in his best interest to make sure that you are happy and would recommend him to others.
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