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Important Elements of a Contract

Important Elements of a Contract

When you are sitting down with your contractor to finalize the home you are building, they will most likely bring a contract for you to sign. Many folks will sign the contract without really understanding it. This is a BIG deal as you need to know what you are legally obligating yourself to. What some people don’t understand is that if a lawful contract is signed in good faith, they are bound to it and the contractor has the right to sue you if you break, or breach, the agreement. (Likewise, you can sue the contractor if he breaches).

A quick example would be: suppose that your fully signed contract states the contractor will be paid weekly. This is perfectly fine and in accordance with laws, but what if you didn’t realize that you are to pay the contractor weekly and you were planning to pay monthly? Your contractor will most likely be upset that you’re not paying and you’ll probably be upset because your contractor is saying he’s going to stop work.

These sorts of disagreements can be minimized if you have a good contract and use it as a way to set expectations on both sides. The body of the contract contains a lot of legalese that many don’t read through or understand, and some of it is just that…legal mumbo-jumbo. But mixed in are some very important elements that you should fully understand. While I’m not going to cover everything, I will go through some very important elements that are fairly standard across the industry. Your contract may be slightly different, but if it has the same sorts of information, you should be fine. The main source of disagreement comes from a vague or incomplete contract. Although those short and vague agreements are easy to understand, they often are little better than a handshake and if there is a disagreement, a poorly written contract will cause you a great deal of aggravation and possibly money.

The most important thing to realize about a contract is that it sets the expectations of the job. It should accurately detail who is involved, where the work is, how much it will cost, when it will be done, and very specific details on what is (and isn’t) included in the price. We’ll go into these in more depth, but first, let’s start with the introduction.

The Contract Intro

One of the first things your contract should define is who you are doing business with: your name(s) should be in full and correct, and the location of your home should be detailed to include a legal description. Knowing the legal name of the company you are contracting with is important and it may be different than the individual you have been working with. This isn’t necessarily bad, it’s just a point to be aware of. And in the event there is a conflict, this is the entity that you must notify.

Depending on your contract type (fixed-price contract or cost-plus contract), the price should be listed and spelled out as it would be on a check…in numerical and written. This is to avoid mistakes and misunderstandings. There should also be a time component, meaning when your house is done. This is another critical component. Your contractor probably won’t be able to say that you’ll be done on “Tuesday the 14th at noon” and that may be ok for you, but it should at least have some time constraint such as within four weeks or four months of the contract signature date.

Scope of Work

This is one of the most important parts of the agreement. This section is often an attachment or exhibit to the contract because it is so long. If your scope of work is one or two sentences, you are probably setting yourself up for disagreement with your contractor. For instance, if the scope says simply per plans and specifications, what plans are you referring to? Do the plans go into detail on the cabinet style, the way you want the tile flooring to be? Probably not; this is why you need a detailed scope of work. But first, make sure that the contract annotates by date and revision the plans you are agreeing to. Most jobs have multiple revisions during the design phase and you and your contractor must literally be on the same page, or in this case, the same plan set when you build.

The scope of work should include details about everything to be installed in your home. Do you want a specific faucet in the kitchen, this is where you have it written in to include manufacturer name & model. The point is to be clear and specific. You know what you want, and this is where you are sharing that info with your contractor. Even if there are some “standard options” that you feel strongly about, put them in the scope of work. This will prevent future he-said-she-said types of discussions and then everybody gets mad at the other party. It’s worth noting, that many contracts have a clause that says the written contract is the sum of the agreement and any other agreements are not valid. So, it’s an important thing to make sure that exactly what you want is in the scope of work. I’ve even seen Owners attach hand-drawn sketches to the scope of work when it’s important. When in doubt, put it in the scope of work. This alone will manage expectations and help your job go smoother.

Changes

As an Owner, you don’t want to pay more than what you agree to. Sometimes, you may want to make a change, and that is ok, but you also want to know what the cost of the change is BEFORE you approve the change. This is the essence of change management. Make sure that your contact has a very specific clause that any change must be approved in writing by the Owner prior to making the change. If the contractor makes a change without getting approval in writing and then bills you for the work afterward, then you would have grounds to reject (i.e. not pay) for the extra work if you have the proper change language in your contract. Here is an example: To be entitled to an increase in the Contract Price or an extension to the Work Schedule, all changes must be evidenced by a Change Order executed by the Owner. Contractor agrees that should it proceed with any changes or additional work before receiving a written and signed Change Order from the Owner (regardless of whether the changed or additional work was ordered by Owner), Contractor will have knowingly and intentionally waived and released all claims for additional compensation and an extension of the Work Schedule, regardless of any written or verbal protests or claims by Contractor to the contrary.

Now, it’s equally important to note that the change order should have a detailed scope work attached as well. I’ve seen change orders that say “change faucet as we discussed,” or “color we selected.” Don’t fall into this lazy trap. Write it down in detail. “Instead of standard kitchen faucet, contractor to install Moen Delaney with Motionsense Spot Resist Stainless 1-Handle Pull-Down Touchless Kitchen Faucet, Model #: 87359ESRS.” This type of detail will communicate exactly what you want to the contractor so they can install exactly what you want.

One thing to remember if you use this type of clause. You are telling your Contractor not to perform any additional work without your prior approval in writing. So, your Contractor most likely won’t start the changed work until you sign the Change Order. If the Owner delays signing the Change Order, the cost may increase. Take for example the faucet above. What if the Owner asks for a Moen Delaney faucet, the Contractor gives a Change Order, and the Owner doesn’t sign the Change until after they notice the standard faucet is installed. Now the Owner would be required to pay the Contractor to remove the existing faucet, rush-ship the new faucet, and then install the new one. My advice to all Owners…as soon as you receive a Change Order for signature, either ask for more info (in writing), or sign & return it, or reject it (in writing) never leave an open-ended change order. Open ends are big sources of disagreements later in the project.

Bottom line is that your contract is important. Read and understand it. Ask questions on anything you don’t understand. Knowing the answers before you sign it will save aggravation down the road. If you disagree with something, change it now. And importantly, make sure the Scope of Work clearly and completely describes the house you want to be built. With a good contract and open communication, your home building experience should be an enjoyable and exciting time.

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