Construction Confusion

We released a book this spring titled “Home Remodeling for Dummies.” Chapter 10 is about construction contracts and it begins: “What literature about contracts would be complete without some mention of the proverbial gentlemen’s agreement — and the inimitable handshake between two people that binds their commitments to each other for all eternity? Certainly not this book. However, it is our understanding that Pope Julius II never did get around to paying Michelangelo in full for the paint job that he did on the ceiling of the Sistine Chapel. Could it possibly be that the legendary handshake isn’t all that it is made up to be?

“Handshake or not, our experience with construction contracts has taught us that if it isn’t in writing, chances are you won’t get it. So, get it in writing, because somewhere between 40 percent to 70 percent of the way through a building project both contractor and customer are often faced with a phenomenon known as selective amnesia, where one or both forget important aspects about what they originally agreed to. At this point, the value of a handshake diminishes substantially and a well-detailed, clearly written construction agreement begins to look mighty inviting.”

A thorough contract between you and your contractor is invaluable and is designed to do two things: Specify who is responsible for what and determine what to do in the event of a disagreement. A contract that properly covers the latter can be invaluable in arbitration or court.

Practically every word in a construction contract can be reduced to a money issue. For example, certain parts of the contract, such as the specifications, explain exactly and directly what you will get in return for your money. Other parts, like start and end dates, indirectly address money issues. Think about it. Start and end dates relate to how long the project will take and, therefore, how long you will be required to pay costs. How much will it cost you in inconvenience if your project runs longer than agreed upon? You might want to include a clause in your contract that requires the contractor to pay a specified sum of money for each day of delay beyond the scheduled end date. Our contract pays our customers $200 for each day of delay.

The contract is the document that ties all the other project documents together by listing them and by setting forth rules that apply to each: plans, specifications, written change orders, subcontracts, payment schedule, production schedule, etc. A good contract should be bilateral, providing equal protection for all parties.

Unfortunately, a thorough contract tends to be wordy. Although many words are needed, we don’t care for contracts that are hard to read — the kind containing language that would confuse a Harvard law professor. Many folks are most comfortable with a one-sheet contract. They aren’t threatening and there is little to read. Unfortunately, a page or two simply is not enough space for the wording that properly protects your rights. The one-sheet contract often provides plenty of protection for the contractor and almost none for you.

Most contracts do a good job of identifying the parties involved. Although you certainly know who you are, what about the contractor? If you haven’t checked him out, do so before signing the contract.

Make sure that the contractor’s business name is legally correct. Also, the address listed should be the one where the contractor’s legal records are kept — not a post office box.

And the contractor’s license number (if required in your area) should be included. Consumers often are duped by contractors who aren’t licensed.

Finally, a contract date and a contract number help to identify your agreement.

There are three basic types of construction contracts: 1) stipulated sum, 2) time and materials, and 3) management.

Stipulated sum contracts

With this contract, you pay a fixed price that can only be modified by a written change to the work — a change order. We like this contract best of all. It has a fixed price and puts the entire financial responsibility of completing the work on the contractor. We think establishing a price in advance makes a lot of sense.

Be sure that your stipulated sum contract is accompanied by a thoroughly detailed estimate. A thorough estimate can help to amplify the details in the plans and project specifications, further clarifying the contractor’s intentions.

In a stipulated sum contract, you pay the amount specified in the contract no matter how much it costs the contractor.

Time and materials contracts

Whereas these contracts are fine for small repair jobs, and some minor remodels, we are uncomfortable using this type of agreement for home construction. In a time and materials contract, the price cannot be determined in advance of the work. Sure, a specified labor rate can be agreed upon, but what about how long it will take for the work to be performed?

Granted, you pay only for the labor and materials used at your project, but who determines whether the amount of labor and material is correct? Here, even the most reputable contractor gets you to pay for every mistake.

With a time and materials contract, comparison shopping is difficult, if not impossible. You can nail down the wage, but you can’t determine how long the wage earner will take.

The management contract

We don’t like management contracts.

With this contract, the manager works as a consultant for a fee equal to a percentage of the contract — usually about 10 percent. If the contract amount is $25,000 the contractor’s fee is $2,500, plus legitimate expenses. As the amount of the work increases, so does the contractor’s fee.

If the price goes down, so does the manager’s fee.

We are uncomfortable with any contracting method that builds in a conflict of interest. Additionally, a standard management contract shifts some responsibility onto the owner.

Even partial responsibility for the construction of a home is not a risk to be taken lightly. The average owner has plenty of responsibility without looking for more.

Remember before entering into a contract: A contract cannot be written in such a way as to protect you from a crook. So, the first step in bulletproofing your construction contract should be to hire a reputable contractor.

And remember, a low bid does not a reputable contractor make. A contractor’s integrity, dependability and ability cannot be measured by the amount of the bid.

Investigate the contractor in the same way that the bank investigates you when you apply for a loan. Have the contractor fill out a credit application. Then, use it to check him out.

We offer just such a document at no charge on our On The House Web site. We call it the Contractor Work Application Form.

Give us a visit at www.onthehouse.com. Or visit your local Better Business Bureau.

Finally, remember this. The contract should always stipulate who will be responsible for what. It also should define when and where the work will occur.

It should address why the work is happening and how to recover if something goes wrong.

For more home-improvement tips and information, visit our Web site at www.onthehouse.com.