Most residential construction companies do a good job at a reasonable price. That doesn’t mean homeowners should complete a handshake. A written contract is always a good idea to confirm the agreement between the parties. It is much more difficult to argue about the terms of an agreement when it is being written.
Most contractors agree that a written contract is a good idea and offer a homeowner the pre-printed form for signature. Therein lies the problem, as this form is certainly the cheapest for the contractor. A homeowner is well advised to read the form carefully and not just assume that it is fair and reasonable because it is pre-printed.
The two most important parts of a home improvement or home improvement contract are the price and the description of what to do. The price is not as simple as it seems.
Some contracts contain a clause that allows the contractor to increase the price if the cost of materials increases. This is generally not beneficial for the homeowner as these contracts usually do not contain a corresponding provision that provides for a price reduction when the cost of materials goes down. Homeowners shouldn’t agree without the other, and most homeowners should insist that the contractor take the risk of increased material costs. This is an incentive for a quick completion.
Payment terms are important. Most contracts require a large down payment, and some have a regular payment schedule if the project is large. The homeowner should ask for an explanation of how the deposit was calculated. The homeowner should also acknowledge that a schedule of recurring payments will not result in the contractor receiving a higher percentage of payments than the value of the work done. The homeowner is in a weak negotiating position if the contract is subpoenaed so that the contractor receives all of the profits long before the job is done. The contract should also require the contractor to provide all subcontractor and supplier releases necessary to ensure that the property is lien free with any prepayment.
Change orders are another area where pricing can be problematic. Change orders relate to changes in the original scope of work and are usually calculated by adding the amount paid by the contractor to a subcontractor plus a percentage for profit and overhead costs. What is wrong with that? There is no incentive for a subcontractor to give the contractor a low price if the subcontractor is paid, and the contractor receives additional profits and overheads. A homeowner should consider requiring that change orders be valued at prices for comparable items included in the original contract. This may mean that the original contract should be more specific in terms of pricing different elements of the job.
If change requests sound like the homeowner is opening their checkbook, so may an additional cost contract. Under a cost plus contract, the contractor agrees to perform work at the contractor’s actual cost, with an additional percentage added for profit and overhead costs. Unless the contract requires competitive offers and evidence to confirm pricing, there is no incentive for any subs or material supplier to provide low prices. The contractor’s profit increases when the subcontractor’s prices increase. Many homeowners find that a cost-plus contract keeps their costs to a minimum, as the contractor does not need to put pillows in or hide costs to ensure the job is profitable. In some cases the opposite is true.
The scope of work should be as detailed as possible. Far too many contracts relate to the general scope of the job. There should be plans, drawings, material specifications, colors, and other details to limit any later disagreement. Details also help limit change requests, which not only affects the price, but also increases the time to completion.
The time for completion should be specified. Most form contracts offered a contractor a lot of escape language for weather, unavailability of materials, labor, etc. Rather than allowing a broad language for delays, the homeowner should consider negotiating a fixed completion date with a built in pillow for the contractor. A homeowner could also negotiate a daily rate for each day of delay after the scheduled completion date. Florida courts will enforce late completion payment clauses as so-called liquidated damages, as long as they are not designed to be viewed as inappropriate and a penalty. In a recent case, the court upheld the contractor’s payment of $ 250 per day for each day of delay.
Often the biggest dispute between a homeowner and a contractor comes with asking the contractor for final payment. The homeowner says the job was not done or not done properly and wants compensation for delays or shortcomings. The contractor threatens to assert a lien unless the contractor is paid. What happens then?
A contractor has a lien on property improvements. Florida law provides attorney fees to the dominant party when a contractor’s lien is excluded. Foreclosure is similar to the foreclosure of a mortgage. Homeowners rarely prevail in these cases because the contractor provided material and improved the property. While the contractor may not get everything the contractor wants, the contractor is usually the winner. Judges and juries tend to find out that someone who has provided materials or services should be paid, and homeowners struggle to prove why payment should not be made.
Disputes on final payment request often focus on incomplete or improperly completed work. The homeowner may want an escrow to make sure the contractor corrects the deficiency. However, most contractors have contracts that prohibit Escrow for punch list items. A homeowner should attempt to negotiate a contractual provision for an adequate escrow account that matches the estimated cost of repairing a defect. Since there may be an argument about what those costs would be, another provision for an outside expert to determine the costs in the event of a dispute may be appropriate.
When the job completed is poor, a homeowner is not without recourse. The measure of the damage in the event of a defective construction are the remedial costs, provided this is not an economic waste. Economic waste means that the cost of the drug far outweighs the benefits. If the cost of remedying were economic waste, the measure of damage is the difference in value between the state of construction and the state of construction. A homeowner may also be entitled to loss of use equal to the fair value of the property.
Most construction contracts do not include a provision for legal fees in the event of a dispute, as contractors know they can enforce a lien and receive legal fees if they can successfully exclude the lien. Homeowners should consider adding a provision in their contract about legal fees for the predominant party. This way, if the homeowner has to sue the builder, the homeowner can be eligible for legal fees in addition to claims for damages. Lawsuits are expensive and the cost of prosecuting them often exceeds the amount of the recovery unless the dominant party has additional legal fees.
Hiring a reputable contractor is a good place to start. Better yet, make sure that the contract is clear and protective for both parties. These are things that should be done at the beginning of a construction project.
William G. Morris is the director of William G. Morris, PA. William G. Morris and his firm have been serving customers in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, clubs and real estate. The information in this column is of a general nature and is not intended as legal advice.