A contract should be the first building block to a relationship between a contractor and an owner. It will set the tone for the relationship and spell out important issues that both sides will want to know. Form contracts like the kind that you can buy at a stationary store or the AIA standards are a good starting point. But, in my experience, the legalese in these contracts is confusing to everyone. And if lawyers get involved down the line, they may tell you the legal meaning of the words, and you will realize this is not what you had in mind at all. As Ben Franklin put it: an ounce of prevention is worth a pound of cure. The contract is that prevention. Here are some tips for making sure the contract you sign is the one you want.

Put it in Writing

I don’t know how many times a contractor or an owner will call me when the situation has become combative, and it is revealed that there was no written contract. The contractor may have prepared a proposal, or the parties exchanged a few emails, but no document exists that spells the terms out. Many sorts of agreements are enforceable as a matter of law. Oral agreements – i.e. agreements made on a handshake – can be enforced if the parties can show the terms that were agreed to verbally. However, time has passed, issues have arisen that may have changed the perspective or attitude of one or both sides, and the oral discussion may have neglected to address the issue in dispute. It is always better to write it down.

A document signed by both of the parties is best. Often, proposals are tweaked before the parties come to a final agreement, and email exchanges rarely spell out the agreement in explicit terms. This creates grey areas – wiggle room for both parties to push their perspective. In litigation, this means that there is a risk that the “other” side will be more convincing about the terms even if you are utterly certain that was not your intention.

Cover the Basics

What is the exchange taking place? Is the contractor proposing to do the work and submit a bill for time and materials (usually plus a profit percentage?). Or is the contractor proposing to do a project of a specific scope for a fixed price – a lump sum? Or is it another proposal? There are pros and cons to different ways to define these issues, and it depends on the type of project, the amount at issue and the priorities of the parties. Regardless, it is better to define this exchange.

What are the payment terms? When is the first payment due? When are subsequent payments due? Will there be invoices? Will there be a retainage amount – a percentage held back until the work has been accepted? What does the contractor have to deliver before receiving payment? Or is the payment on a fixed (e.g. monthly) basis? It’s better for both sides to set these expectations down clearly so that an owner knows when payment is due and a contractor knows when payment is to be accepted.

What is the scope? This is one of the trickiest issues down the line. The contractor determines that there issues that need to be addressed that neither party expected at the outset and wants to be paid extra for these issues. The owner thought that the project was a global agreement to ‘get it done’ so any new issues should be part of the overall service. The answer is usually somewhere between these two, but the clearer and more detailed the scope is at the time the parties enter into the contract, the better. The details can include a list of specific materials, a per task cost allocation, a schedule for completion, a definition of the sorts of issues that are to minimal to cause a change in the contract price, or a definition that identifies the sorts of issues that will definitely cause a change.

Important Bells and Whistles

We lawyers like to make contracts lengthy, detailed and boring. Some of the provisions we want to see can be pretty critical. Here are a few:

Contractor License If the state requires contractors to be licensed and bonded, make sure to include this information in the contact.

Insurance. The contract should identify what types of insurance has. For example, the contract should provide for homeowner’s insurance, general liability insurance, workers compensation insurance. Each of these is a different type of policy. Depending on the size of the job, a contract can provide for minimum coverage limits as well.

Independent Contractor This provision is more protective of the owner. It makes sure that the owner is shielded from issues that might arise for the employment practices of the contractor (e.g. is the contractor complying with wage and hour laws?).

Change Orders. This is a particular concern from my perspective. Having a specific procedure for identifying, pricing and authorizing change orders will give both sides some simple guidelines to follow if this comes up. Remember, if you have the guidelines, follow them! An owner doesn’t want to get hit with unexpected bills, and a contractor doesn’t want the owner to refuse to pay for work completed

Dispute Resolution. If the parties reach an impasse in their disagreement, what happens next? Do you go through a mediation, or head right to litigation or arbitration? Although a complete discussion of the topic is beyond the scope of this article, having a clear disclosure of mechanic’s lien issues is a good idea in any residential construction contract.

Residential construction is an area where one side (the owner) is likely to be highly unsophisticated about the ins and outs of construction projects. At the same time, the success of the project is an intensely personal, emotional matter for the owner, and a significant economic one for most contractors. Having a clear contract will protect both sides and will hopefully help the project go smoothly.

MWH

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