Handshake or not, our experience with construction contracts has taught us that if it isn’t in writing, chances are you won’t get it. So, get it in writing because somewhere between 40 to 70 percent of the way through a building project both contractor and customer are often faced with a phenomenon known as selective amnesia where one or both forget important aspects about what they originally agreed to. At this point, the value of a handshake diminishes substantially and a well-detailed, clearly-written construction agreement begins to look mighty inviting.”
A thorough contract between you and your contractor is invaluable and is designed to do two things: specify who is responsible for what and determine what to do in the event of a disagreement. A contract that properly covers the latter can be invaluable in arbitration or court.
Practically every word in a construction contract can be reduced to a money issue. For example, certain parts of the contract, such as the specifications, explain exactly AND DIRECTLY what you will get in return for your money. Where other parts, like start and end dates, INDIRECTLY address money issues. Think about it. Start and end dates relate to how long the project will take and therefore how long you will be required to pay costs associated with the wait for completion. How much will it cost you in inconvenience if your project runs longer than agreed? You may want to include a clause in your contract that requires the contractor to pay a specified sum of money for each day of delay beyond the scheduled end date.
The contract is the one document that ties all of the other project documents together by literally listing them and by setting forth rules that apply to each: plans, specifications, written change orders, subcontracts, the payment schedule, the production schedule, and so on. Most importantly, a good contract should be bilateral, providing equal protection for all parties involved. Unfortunately, a thorough contract tends to be awfully wordy. And we agree that a lot of words are needed. But we don’t care for contracts that are hard to read – you know – the kind containing language that would confuse a Harvard law professor. We find that many folks feel most comfortable with a one-sheet contract. They aren’t very threatening. And there isn’t much to read. Plus there are rarely any confusing terms to challenge one’s command of the English language. Woefully, a page or two of legal size paper is simply not enough room for the wording necessary to properly protect your rights. In short, the one-sheet contract often provides plenty of protection for the contractor and almost no protection for you.
Most contracts do a good job of identifying the parties involved. And although you certainly know who you are, what about the contractor? If you haven’t checked him out, do so before signing the contract. Make sure that the contractor’s business name is legally correct. Also, the address listed should be the one where the contractor’s legal records are kept – not a post office box. Also, the contractor’s license number (if required in your area) should be included. You would be amazed at how often consumers are duped by contractors who actually aren’t licensed. Finally, a contract date and a contract number help to uniquely identify your agreement.
There are three basic types of construction contracts: 1) Stipulated Sum, 2) Time and Materials, and 3) Management.
STIPULATED SUM CONTRACTS
With a stipulated sum contract, you pay a fixed price that can only be modified by a written change to the work (a change order). We like the stipulated sum contract best of all. It touts a fixed price and puts the entire financial responsibility of completing the work on the shoulders of the contractor. Plus, we think that establishing a price in advance – before the work begins – makes a lot of sense. Be sure that your stipulated sum contract is accompanied by a thoroughly detailed estimate. A thorough estimate can help to amplify the details in the plans and project specifications further clarifying the contractor’s intentions. In a stipulated sum contract, you pay the amount specified in the contract no matter how much it costs the contractor.
TIME AND MATERIALS CONTRACTS
While we feel that time and materials contracts are great for small repair jobs, and some minor remodels, we are otherwise uncomfortable using this type of agreement for home construction. In a time and materials contract, the price cannot be determined in advance of the work. Sure, a specified labor rate can be agreed upon, but what about how long it will take for the work to be performed? Granted, with time and materials you only pay for the actual labor and materials used at your project. But who determines whether the amount of labor and material is correct. Here, even the most reputable contractor gets you to pay for each and every mistake. With a time and materials contract, comparison-shopping is difficult if not impossible. You can nail down the wage, but you can’t determine how long the wage earner will take. As a consumer would you rather sign a contract where the price stays the same no matter what the home costs to build, or would you rather sign a contract where every job cost – necessary or not – increases the price you pay? With time and materials, the contractor with the lowest labor rate or the lowest markup can ultimately end up being the most expensive choice.
THE MANAGEMENT CONTRACT
This type of contract causes us some concern, which is our nice way of saying that we don’t like management contracts. With the management contract, the manager works as a consultant for a fee equal to a percentage of the contract – usually about 10 percent. If the contract amount is $25,000 the contractor’s fee is $2,500, plus legitimate expenses. As the amount of the work increases, so does the contractor’s fee. If the price goes down – so does the manager’s fee. We are uncomfortable with any contracting method that builds in a conflict of interest. Additionally, a standard management contract shifts a certain amount of responsibility onto the owner’s shoulders. Even partial responsibility for the actual construction of a home is not a risk to be taken lightly. The average owner has plenty of responsibility without begging for more.
Always remember this before entering into a contract: A contract cannot be written in such a way as to protect you from a dyed-in-the-wool crook. So, the first step in bulletproofing your construction contract should be to hire a reputable contractor. And remember, “a low bid does not a reputable contractor make.” A contractor’s integrity, dependability and ability cannot be measured by the amount of the bid. Investigate the contractor in the same way that the bank investigates you when you apply for a loan. Have the contractor fill out a credit application. Then, use it to check him out.
Finally, all you have to remember is this. The contract should always stipulate WHO will be responsible for WHAT. It also should define WHEN and WHERE the work will happen. Furthermore, it should address WHY the work is happening and HOW to recover if something goes wrong.
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