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10 Things To Think About Before Signing a Construction Contract

Team of one women architect and two men architects on a construction site. Men are shaking hands. Shot from above.

Whether you're a new home buyer or an existing homeowner, it's a good idea to familiarize yourself with builder contracts. A new construction home or an upgrade to your current home build means learning about the legal aspects of the building process.

A well-drafted real estate construction contract clearly sets out the:

  • Work to be done
  • Price to be paid for the work
  • Terms and conditions of payment

The construction sale contract should also allocate various foreseeable risks that may arise between the parties.

The Importance of a Construction Project Contract

At some point, you may wonder whether you should sign the contract in front of you. These documents are a good thing that should be designed to protect both you and the other party.

Ideally, construction contract documents allow the parties to:

  • Define everything in specific terms, including the parties' mutual obligations
  • List the construction materials, work to be done, and payment terms
  • Provide work warranties
  • Account for Acts of God (force majeure events)

When the contract is signed, it can't be changed unless both parties agree on a change order. So, it's vital to protect yourself before signing a contract. You need to understand exactly what it is you're committing yourself to do. Aside from helping you find a new house or a preferred lender, a realtor or real estate agent can only do so much. You may need to consult an attorney before signing a contract to protect your investment.

Identifying Construction Risks in a Contract

When the parties allocate potential risks, the contract may become more complex. But it reduces the potential for disagreements in "gray areas" that aren't addressed.

Both parties should take the time to read and understand the lengthy document. Failure to read a written agreement isn't a valid defense in a contract dispute.

Considerations as You Create Your Contract

Always make sure construction contract terms are workable for you. Terms should include:

  • A specific definition of the construction project
  • The cost and type materials
  • The date the contract will be complete
  • At what stages of construction the funds will be disbursed

If the terms aren't agreeable, you can negotiate more reasonable terms or have a lawyer on hand for dispute resolution.

Use the following list as a general guide.

1. Time Frame

The agreement should have a time frame for beginning the work and a deadline for completing the job. Both parties should carefully consider the scope of work before setting a completion date.

If you are the contractor performing the work, make sure you're allowing yourself enough time to complete the job. If you're the party paying for construction, make sure the construction schedule conforms to your needs. For instance, a reliable schedule can help you plan a future move-in, resale, or incentives for timely completion of a new home build.

2. Prices

The contract should clearly state at what phases of construction money will be paid. Be wary of using subcontractors. Subcontractors hired by the person contracted to perform the work should be listed on a filed Mechanics Lien Waiver. This ensures that you won't owe money for unpaid labor down the line.

Make sure you know what the additional fees are and ask for an estimate. Additional work would be for add-on items and usually must be cosigned by both parties. This is especially true for ambitious new builds that might involve an expanded scope of work.

3. Payment Method

Determine the terms of payment, including how much will be paid upfront as a down payment deposit. If you're financing, it's important to know your interest rate and under what terms the full payment amount is due. You may also be able to negotiate installment payments if you can't afford a lump sum. If there is a final payment date, discuss the date in advance.

4. Payment Penalties

Determine whether there are late payment penalties and if they are reasonable. Just because a construction contract has certain terms does not mean those terms are valid. New home builders with less experience might be unaware of illegal terms, such as excessive payment penalties. Scanning the agreement for reasonable payment terms helps avoid any misunderstandings.

5. Material Terms

If you and the other party have an understanding of the construction materials, make sure that the particular terms are in a written contract.

For example, if you've agreed to use a particular tile for the bathroom, it should be in the contract. This will help avoid any confusion, misunderstandings, or conflict between both sides.

6. Transaction Rules for Particular Industries

The construction industry has rules for how transactions are governed. If you see something in a contract that does not make sense, ask. Some contracts make assumptions about following a particular industry procedure. If they assume you know, they won't explain the process in the contract. Always make sure you know what the industry procedure is before you sign.

7. Inability to Agree

Sometimes, you need to have work started immediately but can't come to an agreement on the final terms. You need to make sure that you're signing a construction contract that is not going to be enforceable as a permanent agreement. You can accomplish this by adding language like "this interim agreement is in effect only until a more permanent agreement can be negotiated by both parties." It might also make more sense to start with a letter of intent or memorandum of understanding.

8. Resolution of Anticipated Disputes

No matter how careful you are or how good of a relationship you have with the other party, a dispute may arise. Many contracts include an arbitration clause, which means that a dispute must be settled in arbitration as opposed to court. Arbitration is generally less costly and less formal than court. Still, if you sign the contract with the clause intact, you have probably waived your right to take the matter to court.

9. Anticipated Problems

Your contractor may have prior bad experiences from past projects. This often leads to them adding particular methods of resolution to their contract. Those ideas may be perfectly agreeable, but they could also be unfairly beneficial to one side. Analyze whether these terms will benefit you as well.

10. Attorney's Fees

Determine whether you will be charged for the other party's attorney's fees if you breach the contract. Construction contract conflicts may result in litigation, which can be costly. Sometimes, contracts will state that attorney's fees go to the prevailing party. That means the loser will have to pay the winner's fees.

Get Legal Advice Before You Sign a Construction Contract

Construction contracts require careful consideration. Problems frequently arise in the construction process, and the construction contract determines how these issues are resolved. A local construction law lawyer or real estate attorney can give you peace of mind and help you make the right decisions.

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