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Tips For Construction Contracts

General Expertise
By on Jan 12, 2016
Tips For Construction Contracts

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You are about to embark on a construction project. It may be as small as resurfacing a deck or as large as building a new house. Before you begin you need to have an agreement with the contractor or tradesperson who is going to do the job. What kind of agreement do you need? Obviously, the answer depends in large part on the size, complexity, and cost of the project. Also, the state in which you live or in which the project is located may have specific laws concerning construction agreements.

Whatever the size of the job, a written agreement signed by you and the person doing the work is a must. In fact, many states require that a home improvement project agreement (for more than a minimal amount of money) be in writing. The agreement doesn't have to be an elaborate affair filled with legalese. It may vary from a one-page handwritten letter to a multipage printed form. Here are a few types of construction contracts and what must be included.

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What Is A Construction Remodeling Contract?

The contract needs to cover a few essential issues: What is the contractor going to do? Typically, the contractor is responsible for doing the work in a specified manner within a certain time period for an agreed upon price. What are you, the owner, going to do? In addition to paying the contractor, you may be responsible for obtaining permits, preparing the site, buying materials, or just getting out of the way so that the work can proceed. Who is responsible if something goes wrong? Unforeseen things happen on construction projects, people get hurt, materials are damaged or stolen, the project is delayed for one reason or another. Each of these "worst case scenarios" should be dealt with, at least generally, in the contract. Finally, what are you going to do if you and the contractor end up in a disagreement? Is there an independent third party you can both trust to resolve the problem? Often the architect on a project ends up being the middle person, mediating between the owner and the contractor. You can also agree to mediation or arbitration. If litigation becomes inevitable, you may want to agree on the venue for any court action and on the winning party's right to be paid its lawyer's fees.

What To Include In A Construction Contract

Whatever the format of your agreement, here's a quick checklist of essential terms to include:

  1. The parties. This may seem obvious, but, in fact, getting the identity of the owner and the contractor straight may have significant legal ramifications. Be sure the contract is between the legal owner of the property and the individual or entity who's doing the work. If the contractor is a corporation (usually identified by Corporation, Corp., or Inc. in the name), make sure you are dealing with someone who has the authority to bind the company to the terms of the contract.
  2. A detailed description of the work to be done. The more specific you are, the less likely that there will be disputes later. If you have architectural plans or specifications, these can be referenced in the agreement as a way of describing the scope of work. Also, remember that describing what's not included in the job can be as important as setting down what is. Be sure to spell it out if you are doing any part of the job or if other tradespeople are involved.
  3. Price and payment. How much are you going to pay, and when are you going to make the payments? If payments are tied to the amount of work completed (a common practice), you'll have to agree on how the percentage of completion is going to be measured. On small jobs, payments are often made in thirds: one-third when the job is started, one-third at about the two-thirds point, and a final payment on completion. In a large job you'll also want to consider holding back a percentage (typically 10%) of each payment until you're completely satisfied with the work.
  4. Important dates. When will work start? When will it end? Will the contractor be penalized if the work isn't completed on schedule? What about unexpected delays? These are all points to include.
  5. Permits, insurance, and site preparation. All but the smallest cosmetic jobs usually require one or more permits issued by the local building department. The contract should specify who is responsible for getting—and paying for—the permits. The contractor is usually responsible for obtaining insurance to cover personal injury, property damage, and worker's compensation for the duration of the construction. Be sure to get copies of all insurance policies before the work begins. You should also check with your insurance agent to confirm that you are appropriately insured. If the building site needs to be prepared, if furniture needs to be moved or trees cut down, such items should be described in the agreement and the responsible party identified.
  6. Warranties. A warranty is a statement by the person performing the work that if something goes wrong within a certain time period, he or she will fix the problem. A typical warranty on a home improvement job is for one year, but some work and materials (such as roofs, appliances, heaters) may be guaranteed for 5, 10, or 20 years. Make sure the contract spells out the extent and duration of the warranty as well as the name and address of anyone other than the contractor who will be responsible for honoring the warranty.
  7. Change orders. Almost without exception, the scope of a home improvement project changes and expands. The changes may arise because you change your mind or because something unexpected is discovered during construction. You need to provide a mechanism to deal with changes as they come up and an agreement as to how you will be charged for the extra work.
  8. Handling disputes. No one likes to think about a project not working out before it is even started. But spelling out what will happen if something goes wrong is essential. It used to be that construction contracts just assumed the parties would go to litigation if a dispute arose. Given the cost and agony of modern litigation, however, many contracts now provide for mediation and/or arbitration.

This checklist is intended as a guide to important contract issues, not as a comprehensive outline. If you would like more specifics, please see Tips For Remodeling & Renovation Contracts.

Frequently Asked Questions

Q: I'm doing a small remodeling job and my contractor doesn't want a written agreement. What should I do?

Answer: It isn't unusual for a tradesperson doing a small construction project to resist signing a written agreement. Sometimes the contractor is adverse to such "formalities." Maybe she is afraid of being "tricked" by a document she doesn't understand. Although most oral contracts for home improvements are legally enforceable, all but the tiniest jobs should be agreed to in writing. If the job is small and the contractor is really contract-adverse, try writing an informal letter describing your understanding of the agreement. Ask the contractor to let you know if he disagrees with anything in the letter and, preferably, get him to sign it. Don't embark on a major construction project without a carefully thought-out written agreement.

Q: My contractor has just handed me a 20-page contract with tiny typeface. I don't understand it. What should I do?
Answer: Don't sign anything you don't understand. Ask the contractor to explain it to you. If he or she can't, keep looking until you find someone who can. Your state contracting board, a do-it-yourself book from the library, a friend with construction experience, or a qualified lawyer can all help you figure out what's been put in front of you. Also, don't be afraid to cross out things you're not willing to agree to. If you and the contractor both agree to delete certain provisions from a form contract, just cross out those parts and initial next to the crossed-out section.

A construction manager can help you navigate through contracts. See the cost to hire a construction manager.

Author Profile: Amy Slater is an attorney in Berkeley, California, with experience in construction law from both the lawyer's and the client's perspective.

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