Construction Contract is it Important?

At the most basic and common, you want to get the house that was promised, and the contractor wants to get fully paid for the house being built. The contract serves to reflect this understanding and covenant, to make sure there is no disagreement before the actual works begins, and to provide a guide to follow in case a problem arises later. Most often your contractor will provide you with a contract that’s ready for signing.  The contract in its original form may have very few terms with very few details, or it may be so detailed and filled with complicated terms that it is hard to understand. Neither of those situations are acceptable. To fully protect your rights, the contract terms should be complete, specific, detailed and easy to understand.

Scope of Work. This section describes the work that the contractor agrees to perform. This work typically includes obtaining municipal or other permits, and furnishing the labor, equipment, materials, and other services necessary to complete the house. This section also requires the contractor to conform the work to the house’s plans (drawings) and specifications, which should be attached and made a part of the contract. Sometimes, even when contract documents are drafted carefully, they contain conflicting terms in the plans, specifications, and/or the written contract. This conflict can lead to confusion and disputes. For example, if the plans depict a master bathroom with one sink, but the specifications call for two sinks, which is correct? Consider specifying that, in case of conflict between the plans and specifications, the specifications will control. And, in all cases of conflict, the contract should be the controlling document. Ensure that a detailed specifications form part of the approved plans duly agreed and conformed all regulatory requirements.

Timing of the Work. You’ve probably heard horror stories about building projects going off schedule. How do you protect yourself against this? Make sure the contact contains information about when construction will begin, the schedule of work the contractor must follow, and when construction will end (in other words, when can you move in). Extensions of time may be granted for delays caused by:

• -poor weather or other “acts of God”
• -labor strikes
• -payment delays caused by the owner
• -inspection delays caused by the municipality
• -changes or additions to scope of work , and
• -other issues that are beyond the reasonable control of the contractor.

While the contractor may be hesitant to agree to it, consider including a provision for liquidated damages. Basically, this provision states that for every day the contractor works beyond the completion date (subject to the exceptions listed above), the contractor will be charged a certain amount. Such liquidated damage provisions protect the owner from delay, and are an incentive for the contractor to complete work in a timely manner.  This provision is not meant to be a punishment, but compensation to cover costs that the owner will incur due to the delay. These might include costs to store your furniture or costs to rent an apartment during the period of delay. Just ensure that the client also fulfill its financial obligations due to the contractor.

Payment. This section should clearly indicate what, when, and how the owner will pay the contractor. Because the contractor will likely be relying on payments from the owner to fund the construction, the payment schedule must provide a steady stream of money so that the house may be built in a timely manner. A typical contract will require an initial payment prior to construction. Then, on a regular basis thereafter, the contractor will submit an application for payment to the owner indicating the amount of work completed during that cycle. Often, the final payment on a project is tied to “substantial completion.” The contract might say, for example, that final payment is due 15 days after the house has been substantially completed. This is not problematic so long as “substantial completion” is defined appropriately in the contract. Therefore, consider defining substantial completion in the contract narrowly by listing specific items, or restricting work after substantial completion to minor repairs. 

Changes to Scope of Work. Sometimes, after construction has begun, the scope of work changes. This could be due to the owner’s decision (let’s add a built-in bookshelf there!), a requirement from the permitting authorities, or the discovery of an unknown property condition affecting construction. The contract should account for the possibility of such changes by requiring written work orders to reflect changes in the scope of work. Never just tell the contractor, “Sure, go ahead with our new plan,” without creating a written work order that both you and the contractor sign. To do otherwise would open the door to additional unanticipated expenses. Make sure to pay the changes and additional prior to work to avoid overshoot to unanticipated expenses.

Warranty. Although not required, many contracts contain express warranties, describing what types of defects the contractor will take care of later, how long the warranty lasts, your maintenance obligations, and what the contractor is required to do to fix the defects. If your contract contains an express warranty, read it carefully and negotiate the terms if necessary. If your contract does not contain an express warranty, consider adding one to the contract.