So you’ve decided to improve your real property. You’ve selected a contractor to perform the work for you and he hands you an agreement for your signature prior to beginning the work. You look at the multiple page document and suddenly your eyes become blurred with all the language. Hopefully you realize that this is not the time to sign any document or hand funds over to the contractor until you have had an opportunity to have it thoroughly reviewed.
As with any contractual document, you should always seek legal assistance in understanding what your obligations will be before you sign. A contractor’s contract is a legally binding agreement and should be treated with the great respect. You should be leery of any contractor who uses tactics pressuring you to sign now to get your job started ahead of someone else.
This article talks about some typical contract mistakes that you need to avoid getting trapped in when signing a contractor’s contract that may help you during your project when things are not working out the way you planned.
The first mistake that often occurs is the lack of a beginning and completion date for the improvements to be made to your property. Most contractors are not willing to sign up to hard dates because failure to meet those dates opens them up to a lawsuit. However, failure to have hard dates is not much help to you when the work that should have been completed in 12 months takes over 2 years. You should negotiate specific target dates for filing for a permit, obtaining the permit, beginning the actual work (e.g. clearing of land or pouring of a slab) and completion date (e.g. obtaining a Certificate of Occupancy). With these dates negotiated before you sign the contract, you will be in a position to protect your interest in the event the contractor does not perform according to schedule.
The second mistake that is often overlooked is an escalation clause. This clause is usually used by the contractor to pass his increase in costs to you when the estimates or allowances he gives to you are exceeded. Classic examples of when this occurs are allowances for fill dirt, septic tank installation, and land clearing. For whatever reason the allowances in these areas are rarely accurate. The contractor can use these allowances to underbid other contractors only to be higher than other contractors when the final payment is due. You should consider negotiating a fixed allowance amount with no increases over the allowances given you. This will force your contractor to spend more time being up front with the real price of the improvements to be made and avoid a surprise at closing or final payment.
The third major problem that occurs involves change orders. When you sign your contract you will likely be making some sort of selection for materials to be used, color or design. Following your selection you may realize that you want some additional item, higher grade of material or some other design. When this decision is made, the contractor has to alter his schedule and material purchases. This may involve an administrative cost to him to meet your desired change. You should be looking at your contract to see if there are charges for making a change to your selections. If there is a cost, you should negotiate how the administrative cost will be calculated. That is, will the additional cost for a change be a percentage of the overall contract, a flat fee amount, or a percentage of the cost of the new selection. Whatever it is, ask about it and make certain that you understand the language of the contract pertaining to changes.
Another area that you should be aware of is the final payment and when it is due to be paid. Most contracts will call for a final payment to be made when the County issues a Certificate of Occupancy or a Final Inspection of the Work is done and is passed by the County Inspector. Some contracts will use the language of substantial completion. Substantial completion is a difficult measure and typically can only be measured by a court of law when a dispute arises between the owner of the property and the contractor. As a result, if your contract contains a substantial completion clause as the measure of when your final payment is due, try negotiating for some other measurement when making your final payment. You should also try and negotiate the holding back of some small portion of the final payment for a period time to make certain that the contractor will return to fix those small problems that were promised to be fixed but for some reason never were repaired.
Your contractor may also request draw payments during the course of the improvements being made to your property. You should make every effort to make certain that draw payments are based on fixed or measurable events before payment is made by you. You should insist that you see partial releases from all subcontractors who have sent you a Notice to Owner and you should also consider that County inspections be made for the work completed and that they passed the County’s requirements.
Lastly and the most important is what remedies are available should someone fail to perform as agreed and what warranties are being offered to you. Make certain that your remedies are not limited to the cost of repair and your warranties are in writing.
There are many other things to be concerned about when contracting that are beyond the scope of this article. The most important one for you to remember is to contact a lawyer to discuss your obligations prior to signing any contract. Spend the consultation funds up-front and save yourself big dollars in the end – you’ll sleep a lot better at night.