Contracts 101, a Homeowner’s Introduction to Construction and Remodeling Contracts

By Bill Russell. Many of the legal disputes that The Russell Firm litigates stem from a lack of completeness or clarity in the contract executed between the homeowner and the building contractor.  As with any agreement, the more specific and detailed the contract, the less room there is for misunderstanding, dissatisfaction, and ultimately for litigation.  Therefore, second only to the selection of a reputable and licensed contractor, we believe that the contract itself is the most important factor in determining the overall success of the project. This post will introduce basic contracting for the homeowner.   There are several types of construction/remodeling contracts in use, and most states and municipalities exercise considerable control over what must be (or what must not be) included in these contracts for the protection of the homeowner.  Indeed, some types of contracts are banned outright or severely restricted in some jurisdictions, and contractors will generally be familiar with these laws and rules and comply with them.  However, it may be worthwhile to do your own research or consult an attorney who specializes in this area of law, to be sure your contract complies with the law.  The following is an economic and risk analysis of the various types of renovation contracts.   In a “Cost Plus” contract, the builder agrees to procure the materials and perform the construction tasks the homeowner wishes, and the homeowner agrees to pay for the materials and labor at cost, plus an agreed profit margin above those costs.  This contract type is appropriate when the owner does not know exactly what the job will entail, so it requires that the homeowner and contractor have a good deal of mutual trust, and it requires close homeowner involvement in the project.  It does not require the contractor to procure materials and skilled labor at favorable pricing.  The homeowner specifies materials and labor skills as the project progresses, whether or not they are available in a timely manner.  Thus, a Cost Plus contract offers great flexibility and can yield a high-quality outcome, but the homeowner assumes most of the risk of high cost and slow completion.  Adding a Guaranteed Maximum Cost provision to the contract can place an ultimate cost ceiling on the work.   A “Time & Material” contract is similar, but it is appropriate for smaller jobs with a narrower scope of work.  Here, the homeowner knows generally what skill sets, types of materials and expenses will be needed, but not exactly how much of each.  So, the owner and the contractor agree in the contract how much will be charged for each unit of labor and materials.  This contract type places significant risk on the homeowner for extra materials or labor required to correct mistakes or accommodate faulty initial estimates.  Again, a Maximum Cost clause can control the homeowner’s risk.   In most dwelling construction or remodeling projects, homeowners will find a “Lump Sum/Fixed Price” contract to be the most appropriate for their needs.  In this type of contract, the homeowner and contractor discuss in detail the scope of work, quality and material specifications, design features, payment schedule and project timelines, all before executing the contract.  The Lump Sum/Fixed Price contract records and formalizes these details.  The contractor assumes most of the risk here, because the total price and completion date are specified, and he must abide by them.  Reputable building and remodeling contractors protect themselves from excessive risk by using experienced estimators and sophisticated software applications to arrive at achievable cost projections.  The homeowner should monitor construction to make certain that unforeseen challenges are addressed properly, and not hidden behind walls.   What are the most frequent problems for homeowners in Lump Sum/Fixed Price contracts?  Project start and finish dates are probably the most common.  Construction is a demanding business, where tradesmen must be marshaled in a timely fashion to avoid idle time or delay-causing overlap, so the contractor will want to set the start date for his own convenience.  Likewise, your contractor will know that weather and other events beyond his control will often delay completion, so he may try to draft a contract with no promised completion date.  If specific start and completion dates are important to you, be sure to include them in the contract, but expect an “act of God” provision to be inserted by the builder.   Also remember that any changes in specifications after the contract is signed will almost certainly place the agreed completion date and cost in jeopardy, so take extra care to correctly describe the features, quality and materials for the project in the original contract.  Specifying “red oak solid hardwood floors” in the contract is good, but failing to state that the floors must be level and flush with the walls still leaves room for dissatisfaction and future lawsuits.  And always remember that change orders are the contractor’s most effective weapon against homeowners in construction litigation.   Many other common troubles can be prevented by specifying that all work must be completed according to the governing building codes.  In addition, state or municipal governments often promulgate regulations, such as the District of Columbia’s 16 DCMR § 800 et seq., that govern home improvement contractors’ business practices.  It is always good to be familiar with these regulations before you execute your contract.   The Russell Firm can review your proposed contract before you sign.  We can also assist in negotiating it with your contractor, which can be a cost-effective way to prevent future problems.  And remember, we will be happy to help with legal remedies if your construction project does not turn out as you expected.   Note: The foregoing post contains general observations applicable to many construction contracts; this is not legal advice or business advice tailored to any particular legal issue.  This should not be construed as legal advice or business advice, nor does the reading of this column create an attorney-client relationship between the reader and the Firm, or any attorney(s) at the Firm.  If you need legal advice in analyzing your contract or filing a complaint, contact a licensed attorney as soon as possible.  The Russell Firm will provide a free consultation. 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