The Construction Contract
March 29, 2009
The three most common types of construction contracts are:
- Lump sum
- Unit cost
- Cost plus
In a lump sum contract, the contractor gives a set price for the work described. If the actual cost of the work is not what the contractor expected, the contractor enjoys the savings or pays the overages. The owner is protected from changes in price that are not due to changes in the work.
In a unit cost contract, the contractor specifies the cost for a unit of work. A carpet contractor may quote $22 per square yard for a particular carpet and pad installed. In this case, the contractor is protected from any variations in estimating the size of the job. If the owner decides to carpet or not carpet the closets, the owner saves or pays the difference at the rate of $22 per square yard.
In a cost plus contract, the contractor keeps accurate records of labor and materials costs on the job, and adds a fee for his time and effort. The fee may be a set amount or it may be a percentage of the actual costs. In this type of contract, the owner pays the costs and the fee. The contractor takes no risk and has little incentive to keep costs under control. Anyone not experienced in managing cost plus contracts should avoid them.
Estimates, Proposals, and Bids
A contractor may give an estimate for the work being discussed, but an estimate is not binding unless it is in the form of a contract, proposal, or binding bid.
Sometimes price and terms may be presented as a proposal. A proposal is essentially a contract that the contractor has already signed indicating his willingness to be bound by the terms given. The owner can choose to sign or not sign the proposed contract. A proposal usually has a time limit for acceptance and expires when the time limit passes. If the owner signs and returns the proposal to the contractor before the time limit is up, then the contract becomes valid.
A contractor will often leave a proposal for the owner to look over at his or her convenience and usually give the owner between 3 and 30 days to decide. If the contractor is not willing to leave the proposal for you to look over and tells you it’s a take-it-or-leave-it deal, don’t sign it. You may be dealing with someone unscrupulous. (See Shady Contractors: Warning Signs to Watch For.)
A bid is an offer of price and terms for the proposed work, and it may be in the form of a proposal or a binding bid. Whereas a proposal is a contract already signed by the contractor, a binding bid is not the actual contract, but an agreement to enter into a construction contract if the bid price and terms are accepted.
Description of Work
The most critical part of a construction contract is the description of work. A poorly written, incomplete, or misunderstood description of work is the source of many construction disputes.
The description of work should specify in as much detail as possible what is being furnished as part of the contract and what is not being furnished. It should also specify the quality of the materials being proposed. If appliances are part of the contract, make and model should be specified.
One way to find out if there are any differences in expectations between you and your contractor is for you to write down everything you think is being included and anything you’re not expecting to be included. If your list doesn’t match what’s in you contractor’s mind, the best time to discuss it is before signing the contract.
Allowances
In many instances, the contractor will give the owner the opportunity after construction has started to select lighting or other fixtures, choose carpeting, or pick out appliances. Since the contractor can’t predict in advance what the owner is going to select and how much it will cost, the contractor includes these items in the contract as allowances.
For example, a contractor might include a $4,000 allowance to carpet all the rooms of a house except the kitchen and bathrooms. If the owner picks a carpet that ends up costing $4,300, then the owner has to pay the extra $300. If the owner picks a carpet that only costs $3,600, then the contractor reduces his contract price by $400.
If your contractor is proposing any allowances, be sure they are adequate. A contractor may intentionally include very low allowances to bring the project into your budget. Or the contractor may not have realized you have really upscale tastes. If $1,000 is listed as an allowance for stove, dishwasher and microwave, you can probably anticipate having to select lower-end appliances or pay the extra cost for higher-end appliances on top of the contract price.
Payment Terms
The construction contract must clearly specify the payment terms. This usually consists of a down payment to start work, often several progress payments, and then a final payment on completion.
Some states place limits on start-of-work payments to reduce the likelihood of owners falling victim to scam artists who take a large up-front payment and then skip out without performing any work. For example, the limit for a remodeling contract in California is 10% of the contract price or $1,000, whichever is less.
Progress payments should be commensurate with the cost of the work completed. Ideally, the amount of money remaining to be paid should always be enough for you to hire someone else to complete the rest of the job if your contractor becomes unable to.
The final payment is often around 10% of the contract price or an amount roughly equal to the contractor’s profit on the job. Never make this payment until the job is 100% complete, you’re completely satisfied with the work, and you’ve received final building department approval.
The Fine Print
Most boilerplate construction contracts contain a substantial number of detailed terms in the fine print. Most are fair on the surface, although if they lean one way or the other, it will be toward the contractor. In a large percentage of cases, the contract is completed without anyone ever having to make reference to these terms. Nonetheless, they are part of the contract and both you and your contractor are bound by them. “Not reading the fine print” is not a legal defense.
If you have any questions about the meaning of any of these additional clauses, ask your contractor. If you still have concerns, ask a construction attorney.
Related Articles
- Questions to Ask Your Contractor Before You Sign
- Should You Ask for A Performance Bond?
- What Does Liability Insurance Cover?
Got something to say?