Contracts and Construction

In construction (or any business for that matter) contracts are an absolute essential. Having a written contract at first glance seems to suggest that parties may not trust each other, or otherwise feel the need to hold each other to more than verbal account. But like so many other things in life the truth is actually the opposite. A contract signifies that two parties trust each other enough to commit time and money to each other's causes, and to provide a written account of that commitment to each other. Contracts signify respect, not suspicion or mistrust.

I tell my clients before every project that contracts will make us better friends and produce much better results. Contracts are expectation management devices. They are guarantees, time tables, and peace of mind documents. They allow you and your Contractor to sleep easy knowing exactly what is expected of each other through the construction process.

Contracts are also conflict avoidance mechanisms. Problems that could normally arise during the construction process are sidestepped because these magical documents serve as a guide when the waters get a bit turbulent.

In residential construction, there are many types of contracts: lump sum, time and materials, design/build, and other more exotic versions as well. The most common type of contract is the lump sum contract. Lump sum contracts state simply that your contractor will provide "X" - materials and labor to remodel your bathroom for example - and you will pay him "Y". Contained within this contract will be a scope of work which designates exactly what your bathroom remodel would look like, what materials would be used, what isn't included, and the timetable for completion.

Another common type of contract is known as the "time and materials" contract. Put simply, your contractor will charge an hourly rate based on the "time" he spends working on your project, and you will pay his materials cost usually plus a fee for sourcing and delivering the materials to the job (usually around 15-20% on top of actual costs)

A few things to consider when deciding what type of contract to use when planning a job are:

1. How large/small is my project in terms of scope?

2. How many variables/unknowns does my project contain?

3. How long will my project take?

Generally speaking a lump sum contract is more flexible and better suited to a wide variety of jobs. For instance, if you are building a home and hire a contractor to take it from wooded lot to occupiable structure, a lump sum contract would do just fine. Your contractor would look over your plans, estimate a budget, timeline, plan for contingencies, account for changes/upgrades if you choose them, and give you price tag for your home. Upon completing different milestones in the construction process you would pay him a "draw", or a portion of the funds as payment for his services along the way.

Another example could be a simple bathroom remodel or roof replacement. Easy enough for a lump sum contract to handle as your contractor would employ the same process and provide you with a total cost for the proposed scope of work, and you would pay him on completion or through a draw system once again.

But there are some instances where a lump sum contract may not be quite right to suit you or your contractor's needs. For example: let's say that you are about to undertake a large renovation project on a home with structural damages (think fire, termites, water intrusion). In that case, you may be in a situation where unknown issues beneath the surface prevent your contractor from providing you a fair estimate of what exactly needs to be done. In this case, paying the contractor a fair rate for his time plus whatever materials end up being needed could be a better option for both of you.

Another example of a "time and materials" contract might be if you are building something that is extremely customized, or otherwise wish to assert more control over the building process. Custom homes are sometimes built this way, as homeowner/contractors may want to have more power over the completion of their project.

"Thanks for telling me about all of these different types of contracts, Chuck! But how the heck do I write a contract?"

Most contractors will provide you with a contract for work the work they will be performing. In fact, a contractor who wishes to enter into an agreement to do work for your without a written contract is a contractor you probably want to avoid. See my post on "What Makes a Good Contractor?" for more info on this.

But if you prefer to write your own contract for work feel free to consult an attorney versed in construction law, or simply pick up a free template on the internet. Though if you do go it alone, make sure to use a contract template that takes into account any special rules or regulations in your area! Different states have different rules, and sometimes rules vary on a county or even city level.

A few basic things to look for in a construction contract are:

1. Name, address, and contact information for all parties involved.

2. A clear, specific legal description of the site where the work will be performed.

3. An exact description of the services to be provided and materials used.

4. A completion date for those services.

5. The total amount to be paid for the services provided, or the rate of pay for services provided.

6. The way that payments will be structured.

7. An agreement by the contractor to accept liability for damages.

8. An agreement by the contractor to provide insurance and/or bonding.

9. Warranty information, as it applies to the specific job.

10. A way to handle disputes if they do arise.

There are of course other elements to a contract that you should be aware of, and there are endless clauses and provisions to be accounted for as they apply to different projects and scopes. But at least let this serve as a guide to stick in your mind when either creating a contract or reading through a contract that is presented to you. In the case of contracts, proper planning will prevent plenty of heartache later!

In the end contracts are simple yet essential tools for relationship building and expectation management. They are the third party in otherwise two-party agreement. No bias, no grey area, no ability to alter themselves based on opinion. Contracts, when used correctly will serve you, your contractor, and your home well and will produce a result that you'll love for decades to come!