Your building contract is going to be the most important document, other than perhaps your mortgage, that you sign for your building project. It pays huge dividends to put some forethought into its production and detail. What follows is a brief punch list that will hopefully guide you in drafting a document that serves your needs and gets your project done on time and on budget.
- The parties to the contract. Make certain that the parties to the contract, particularly the project owners, own the property and/or have the owners’ express authority to do the project. Further, if you are the contractor, and you are a corporation, make certain your signature reflects that.
- Scope of the work. List all the relevant plans, diagrams, specifications, material schedules and, if available, pricing schedules that exist for your project ahead of time. Take the time to add the details early on, and it will save you heartache later on.
- Cost of the work. If you have a flat fee bid for work to be done, make certain the work is outlined in detail. If the job has an “allowance item,” make certain that both the contractor and the project owner know what the allowance is and where that allowance is likely to end up when the project owner starts making decisions on exactly what they want. If the project is billed on what is commonly called a “time-and-materials” or “T & M” basis, even more variability and uncertainty is built into the contract. “Time-and-materials” means there is no fixed or set cost for the work to be done, but is instead going to be invoiced solely by the amount of time it takes and, of course, any materials that are used by the contractor to complete the job.
With an efficient and honest contractor, “T & M” is an extraordinarily good setup. Also, some small parts of a construction contract generally must be bid in this fashion. An example might be excavating or perhaps drilling a well for the property. However, time-and-materials bids should be avoided unless a bond of trust exists and there is a history of performance between the contractor and the project owner.
- Change orders. Change orders occur with virtually every construction contract. The parties are strongly encouraged to make detailed written agreements regarding change orders before the change is made. Neither party should be bashful about asking the other about the cost of a change order and whether the cost will be paid. The earlier the question is asked, the better.
Some of the areas I have noted above may seem obvious, but you would be surprised at the number of disputes that have arisen between owners and contractors on these seemingly basic topics. While most project owners and contractors perform their duties in good faith, probably 90% or more of all construction disputes start with one of the above factors not being spelled out properly. In its most simple form, the expectations of one party are not the same as the expectations of the other, and thus a dispute will arise. A good contract will better define each parties’ expectation and minimize disputes.
Different states may also have requirements for mandatory paragraphs in construction contracts. In Michigan, contractors are required to have a boiler plate paragraph regarding the requirement of licensing for residential builders, electricians and mechanical contractors. Depending on what state you are in, you will need to contact your local building department, or perhaps an attorney, to ensure you include the necessary language.
Ultimately your building experience, as either a contractor or a project owner, will only be as good as the parties’ behavior toward one another. In the vast majority of building projects that behavior is exemplary and wonderful results follow. It is worth the time to make certain you are comfortable with your owner and/or builder, as in the long run it will mean far more than the rock-bottom price someone will likely bid in order to get the work. Honesty and earned trust are worth far more than a low bid. Good luck in your building projects, and you are welcome to contact me if you have any questions for which I might be of assistance.
Besides being a past President of the Home Builders Association of the Grand Traverse Area and a licensed contractor, Robert Whims is an attorney at Whims Legal Group, PLC, located at 12935 S. West Bay Shore Drive, Traverse City, MI 49684. Telephone: 231-938-6099; Facsimile: 231-421-6686; E-mail: rwhims@whimslaw.com