There are many different complications that can occur during a remodel. If you are a homeowner looking to enter into a construction contract, this article will give you a brief overview of what you need to look out for. There are basically two types of construction contracts, fixed price contracts and cost plus contracts.
1. Fixed price contracts
Fixed price contracts are where you give the contractor the design and the contractor tells you what the entire project will cost. Beware, however that just because a contractor gives you a price for the entire project does not mean that you have a fixed price contract in place. Often I have seen homeowners who thought they had a fixed price contract only to have the contractor provide documentation showing that what the contractor provided was an estimate, not a fixed price. That is why it is important to set it out in writing in the contract.
2. Cost plus contract
A cost plus contract is where the homeowner agrees to pay the contractor’s costs plus overhead and a fee. I strongly recommend homeowners not to enter into cost plus contracts without a good understanding of the risks. The largest risk is that you have agreed to pay whatever the project costs and in fact you may be paying more than that without knowing it. Labor rates, markup of subcontractor and supplier bills are common areas where homeowners can get charged more than they are expecting to pay. Be very wary of entering into cost plus contracts. I will cover this in greater detail in a later article.
Get it in Writing
The written contract should have provisions for the start and completion of construction and the process of dealing with unexpected conditions and changes from the initial plan. In the industry, this is known as the “change order” process whereby the contractor submits a request for more time or more money (although sometimes less) resulting from a change from the plan or the discovery of some unexpected condition. It is critical to set out this process in the written contract so that you do not end up getting a change order from your contractor after the work is done and the costs incurred. Often times there are alternatives that may cost less and you will want to know that before the work is done.
Payment terms are, of course, critical to the process. Did you know, for example, that a contractor cannot ask for an initial deposit of more than $1,000 or 10% of the project, whichever is less? Did you know that it is illegal for a contractor to bill you in advance of completing any particular portion of the work? California law sets out how the payment process is required to be set out in the written contract and it is designed to make sure that you are getting what you are paying for. Following the State requirements is a must.
In my next article I will talk about how to manage the project to keep your property free from liens and if and when to pay subcontractors and material suppliers directly or by joint check payable to the contractor and the sub or supplier. The discussion above is not intended to provide legal advice to any particular individual but simply to give the readers some things to think about. Every situation is unique and if you have not done this before I strongly recommend that you contact your own lawyer and make sure you get it right before you get started.
If you have any further questions don’t hesitate to give us a call at 650.327.2900, or visit our website at www.BrewerFirm.com.