Contractor Problems Start with Contract

 A property owner hiring a contractor starts from two disadvantages. Most owners do not have experience in construction and do not really know what should be specified in a contract with the contractor. The second disadvantage is most owners are not contract experts and certainly not experts in construction contracts. 

Property owners are somewhat at the mercy of the contract presented by the builder. That contract is usually a form drafted by the builder’s attorney or which the builder has cobbled together based upon contracts of other builders. Those contracts are not favorable to the owner. When the owner later has problems, many of them can be traced directly back to contract terms.

Time for completion is usually important to the owner and most contractors will agree. But most construction contracts are full of loopholes for completion date. The first loophole is completion date is usually referenced as an estimate with disclaimer language for various circumstances. Some contracts go even farther and allow extensions based upon availability of subs, material suppliers and other contingencies. Although the contract may impose a penalty for late payment on the owner, there is usually no penalty for contractor delay.

Many owners put up with numerous delays before they even think about consulting an attorney. By the time the owner goes to the attorney, construction has been delayed for months and because the owner has not taken any action to force timely work, the owner may have waived claims for delay.

How can an owner limit exposure to the delay problem? First place is the contract. A starting point can be definition of when the time for completion starts to run. Most contracts provide that time for completion does not start to run until the permit is issued. The contractor is responsible for filing the permit application. Delay in applying for permit delays issuance. Incomplete permit applications or problems with plans and specifications can also delay. The contract should require the contractor file a complete permit application by an agreed-upon date and make the contractor responsible for any delays caused by incomplete or other application problems.

Owners should also ask for a requirement that there be no less than short gaps in substantial work on site. Some contractors will refuse that provision, but for those that allow it, the contract requires a continuous process of on-site work with limited breaks. One of the problems with local construction is downtime when subs or materials are not properly scheduled or simply fail to show up. If the contractor agrees to limited gaps in on-site work, the contractor is telling the owner the contractor has reliable subs and sources for materials.

The contract should include a definite time for completion. If the contractor thinks there could be a delay or problem, the contractor should discuss that with the owner and the parties agree upon a reasonable time including some built-in “extra time” for possible delays. Acts of God can be an exclusion or add time to complete but acts over which the contractor should have some control should not. 

Completion should be made time of the essence. Owners could consider a bonus for early completion and the parties could also agree on an amount of damages for late completion. The general measure for late completion is what the home could have been rented for if construction completed. That can vary depending on the property.

Cost is often an issue. The trend in contractor provided contracts these days is cost-plus. Under a cost-plus contract, the contractor gets a percentage added to the cost of construction. That sounds like a fair arrangement, but there is no incentive in that arrangement for anyone to minimize costs. This same problem accompanies change orders for which no set price has been agreed in advance. 

It is recommended that an owner insists on a fixed price contract. As for change orders, pricing and change orders should be mandated to be comparable to pricing for same items in the original contract. That means the contract should specify pricing for components rather than be a lump-sum. It also means an owner should minimize change orders and try to get it right the first time.

Allowances can be a headache. Allowances give the owner a set amount within which the owner can select electric fixtures, appliances and other components. If the allowance is insufficient to pay the cost of what the owner selects, the owner gets a bill for more. That makes it important to review allowances carefully to be sure they realistically cover expected cost. And there should be a provision allowing credit to the owner if the owner’s choices do not use up all of an allowance.

Payments to the contractor should require partial lien releases from all subcontractors and material suppliers and a lien release through date of draw from the contractor. When contractors do provide releases, they are usually only through the previous draw as the contractor will explain the contractor is using the owner’s funds to pay for the work between the last draw and the current draw. That means the owner is always one draw behind. It is a common practice and there is not a lot that the owner can do to protect against contractors not paying subs and material suppliers for the work between draws other than require posting of a completion or payment bond. Those bonds are expensive and are usually only used in larger commercial projects.

Most construction contracts try to eliminate an owner’s leverage to hold back money until the project is satisfactorily completed. Most contracts state there is no holdback for punch list or defective work and only a promise that the builder will remedy. Most contracts also prohibit the owner from occupying the home until payment in full and a certificate of occupancy is issued. 

The builder is pretty much the only party who can get a certificate of occupancy issued from the permitting department. That places the owner in a weak position. The owner should negotiate a provision in the contract for reasonable holdback for punch list and incomplete items, mandate that the contractor obtain certificate of occupancy upon substantial completion of construction and refuse a provision prohibiting occupancy until payment in full.

Once the contract has been addressed, construction can start. It is important the owner not simply go along with delays or problems with the contractor. The owner should require strict performance with the contract, diligent effort to complete and not try to get along or be cooperative as problems arise and a contractor delays. Trying to cooperate and get along with a contractor makes it difficult to later argue  the owner did not accept problems in performance.

Hiring an attorney can also help avoid problems by getting a good contract and insisting on proper performance through proper legal process. A lot of owners do not hire an attorney at the start because they do not want additional expense and think all will be fine. As problems arise, most even wait far too long as their problems worsen. An owner can minimize potential problems with a well drafted contract and legal assistance along the way. The owner should decide early on that “insurance” is worth it.