Construction Contracts: What Makes a Contract

So after that rousing diatribe against binding arbitration clauses, lets turn around and get back to basics. What makes a contract a contract? And what can a contract do for you?

It will come as no surprise that we both believe in having a written contract for work on your house. In some states, it's pretty much the law. In California, any agreement valued at over $500 needs a written contract. But the reason you want a written contract rather than an oral one is that it shows both what you agreed to pay and what the contractor agreed to do. If all you have is an oral agreement, there's no one place to go for an impartial answer to any conflict; everything is going to be based on your and your contractor's interpretations of the agreement. If you make it a policy to never have any work done without a written contract, you're in a better position in case of dispute.

More fundamentally: the contract is the foundation for the work. It's what the relationship between you and the contractor is built on, and it defines your roles and responsibilities. You will refer to the contract over and over throughout the construction process, so it's worth spending time and money on up front.

Legally, a contract requires three things: an offer, acceptance, and consideration. That means that the contractor will offer to do the job for a certain price, you will accept that offer, and both of you get something out of the deal (you get the work, the contractor gets the money). Lacking any one of those, what you have is written on paper but not a contract, and nobody is bound to it. The most common form of that would be an offer tendered on paper by the contractor, which you choose not to accept.

Most written offers that can convert to contracts have an expiration date. For example, you will have 30 days to accept, or the offer is rescinded. But expiration dates are not required. If there is no expiration date, then the contractor ought to retract the offer in writing as soon as he's no longer willing to stick to it, but they often don't because they forget the offer is out there. While you could theoretically sue a contractor who made you an offer in writing several years ago, with no expiration date, for not being willing to do the job for the same price today, you should know that it will cost you a lot of money up front, you're not guaranteed that a jury will decide your way, and you might as well spend the extra money to just do the job at the current market price. So basically you have a reasonable amount of time to accept an offer, counter it with a different offer, or reject it completely.

I would not accept a contract that did not include a fairly detailed scope of work. From the point of view of an architect, the contract documents should include a set of plans and a specification book, which are attached to the contract by reference. Anything in the plans and specifications is included in the scope of work unless called out as out of scope. Anything less detailed than that is really not acceptable.

A contract should also, in my opinion, include a planned schedule of work and a fair payment scheme. You don't need to generate those, an in fact they usually come from the contractor, but they should be part of the contract before it's signed. There should be a provision for change orders, and what a change order is should be clearly spelled out. Provisions like that are over and above what is required for a minimal contract, so you'll need to make sure they are included.

Many residential contractors use a standard contract form. Usually it's from a packet of pre-printed forms that you can buy at an office supply store. More sophisticated contractors will have a contract their attorney has drawn up. I've said it before, and I will say it again: you are the one paying for the job, so you should provide the contract. Rather that just signing the form contract and letting the contractor define the terms of your relationship, you should look for a good construction attorney, pay for a meeting to discuss your needs, and get that attorney to write up a contract for you.

This is less true for smaller jobs. If you can afford to lose the amount of money in the contract without endangering your financial situation, you can afford to use the office-supply contracts. Around the Bay Area, my benchmark for that is $10,000 total project cost. It's a different amount in places with a lower cost of living, obviously, and it may well be different for you. You choose the amount you're able to risk on a non-specialized contract.

To save some money on a custom contract, you may wish to simply use the AIA (American Institute of Architects) standard contracts. Those are generally fair to both parties and, being standard contracts, are known entities to contractors, so there will be less balking at using your contract. You can buy copies of those contracts from your local AIA office (or have your attorney do so) and have your attorney make sure they are configured in the way you want. You're basically saving some billable hours writing up the contract. Your attorney can advise you better than anybody on the internet, of course.

Basically, you end up giving the contractors a bundle of paperwork: a set of plans, a specification book, and a contract. They return it to you signed, with a schedule of work and a payment schedule (or your contract has provisions for payment). You can negotiate back and forth about price or schedule or other details, then sign the negotiated contract and proceed with the work.

Now you're in the clear, right? Wrong. As work proceeds, you will be getting work reports, payment requests, and change orders, and you need to review each one and make sure that it is legitimate. Your contract is only as good as your attention to it throughout the process. Many commercial developers hire construction managers to handle a lot of that detail for them, but such a manager is hard to find for residential work (there's not much money it in because most residential projects cost so little compared to commercial projects, while requiring the same amount of work). You might find it useful to arrange a regular walk-through on the site with the job foreman, reviewing the work report and checking to see that everything was completed as reported. You can also discuss needed change orders, and have your attorney draw those up if they are significant (because a change order is a contract modification). Refusing to write out a change order that is required in order for work to proceed is going to put you in breach of the contract, so you'll need to stay on top of anything your contractor brings to your attention as a needed change.

This is where having a good set of plans as part of the contract is helpful. Not only do you have your original scope spelled out, but you can compare the work reports (and your own site inspection) with the schedule in the contract, and with the drawings for the project. When things seem not to be lining up right, you need to know why, and you need to know that before you write the check to cover that payment request. The contractor will be motivated to resolve the situation in order to get paid, which is more of an incentive than the vague threat of a lawsuit. And when it's time to deal with an uncovered condition, such as sub-standard framing inside a wall, you know whether upgrading the framing was included in the original scope of work or not.

One thing to be clear about: the only leverage you have is the payment. If the contractor says something like, "We can work that out later, but right now I need to get paid," you should not pay him until the situation is resolved. If he's messed up the tile work and you want it fixed, it should be fixed before he's paid for the work. Because if you pay him, you've as good as said the work is acceptable as-is. Certainly you have very little to hold over his head to make him fix the work.

So your contract defines the job, lays out who will be doing what, for how much money, and when. It says how you will handle disputes and changes, and lays the ground rules for your interaction with the contractor. As your part of maintaining the contract, you have to make sure that the contractor is doing what he said he would. You'll have your own end of the contract to uphold, including issuing change orders as required, writing checks, and generally staying aware of the process. The contract is the defining document for this relationship.

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posted by ayse on 08/30/09

2 Comments

Regarding payment schedules, you should generally not put down more than 10%. By California law, it's 10% of the total or $1000, whichever is less.

Agreed, Gene, and that is the maximum, not what you should expect to have to put down.

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