A Primer on Typical Residential Construction Contracts
Residential construction contracts are vital components in the construction industry, serving as legally binding agreements between homeowners and licensed contractors. These contracts outline the scope of work to be performed, the timeline for completion, payment schedules, and any warranties or guarantees. Their existence aims to protect both the homeowner’s investment and the contractor’s reputation by clearly defining responsibilities and expectations from the outset. This prevents scope creep and potential disagreements that might arise during a build.
They are typically in writing, but not always. But oral contracts are still enforceable . Of course, written contracts are much better at creating greater certainty between homeowners and contractors. Homeowners are encouraged to hire licensed contractors that have signed and filed the relevant paperwork with the state. This is not only to protect their legal rights, but also to make enforceability of the contract easier.
Generally, as long as the essential elements of a contract are present, the contract is enforceable. The essential elements of a contract are: an offer or "promise," acceptance of the offer, consideration (something of value exchanged), and a clear description of the work to be performed.
Common Provisions in a Sample Residential Construction Contract
After the parties agree on the scope of their project either as a result of negotiations or as required under a home improvement statute (described below), they must then agree on the remaining terms necessary to create a legally binding contract, such as the start and end date, payment terms, warranties, and late penalties, as well as what happens in case of litigation, i.e., dispute resolution, mediation, venue, etc. This sample contract is not exhaustive, nor is it intended to be. It is the reader’s job to review the law, either by oneself or through the assistance of an attorney, in order to determine which terms may be applicable to it.
An example of a sample residential construction contract is as follows:
PARTIES
This Agreement shall be entered into as of the _____ day of __________, 20____ between _____________________ ("Owner"), whose address is __________________, and ___________________, (Contractor), whose address is ____________________________.
SCOPE OF WORK
The Contractor shall perform the Work specified in the following Contract Documents:
- Scope of Work – Attachment A
- Drawings prepared by ____________________ dated _______________ _____________
- Specifications prepared by_____________________________________________ dated _______________ _____________
- Addenda as follows: 1____________ ________________, 2____________ ________________, 3____________ ________________
COMPENSATION
In consideration for the Contractor’s Work performed, the Owner shall pay the Contractor a lump sum of $______________ and according the schedule and percentages set forth below:
Under the Contract Documents, an addition of or deduction for each item or quantity of Work will be made by appropriate modification of this Agreement, in accordance with a written Change Order signed and dated by the Contractor and the Owner.
INDEMNIFICATION
Owner agrees to defend, indemnify, and hold the Contractor harmless against all claims for damages, losses, or costs to the extent caused by any breach of this agreement, negligent acts, errors, omissions or recklessness of the Owner or the Owner’s agents, employees, clients, or anyone for whose acts Owner is responsible.
WARRANTIES
Contractor warrants that materials and equipment shall be new, of good quality, and free from all defects, except as otherwise provided in this Agreement; that Work shall be free from any significant defects; and that Work shall be in close conformity with the Contract Documents. All Work not conforming to these warranties shall be considered defective. If required by the Owner, the Contractor shall furnish satisfactory evidence of the kind and quality of materials and equipment provided. This warranty shall not be considered in any way as a limitation on warranties and guarantees required elsewhere.
LIQUIDATED DAMAGES
Time is of the essence in the performance of any obligation required of the Contractor under this Agreement. The Contractor and Owner recognize that the actual damages that the Owner will sustain upon the Contractor’s failure to complete the Work within the specified Contract Time are impossible to ascertain. In light of the uncertainties involved in fixing actual damages, the parties agree that liquidated damages in the amount of $___________ per calendar day for each calendar day that the Contractor’s completion of the Work may be delayed beyond the dates established in this Agreement will be an adequate remedy for the Owner. The Contractor, therefore, waives all claims against the Owner for any damages caused by the delay of the completion of the Work save the liquidated damages specified herein.
Compliance with Applicable Legal Requirements
The website Law Insider allows you to search for existing contract templates, such as a construction agreement. If you dig into the terms of the fine print, you will soon discover that California is quite unique in its requirements for residential construction contracts. Thus, both homeowners and contractors doing work or offering to do work on California homes should be familiar with the laws governing the content of residential construction contracts.
The Home Improvement Contract Act (HIC) governs all contractors for residential construction in California. The HIC mandates that every residential construction contract include the following provisions: The HIC also contains additional requirements for specific types of work including complete bathroom remodels, kitchen remodels of more than $1,000, swimming pools, spas, and hot tubs, essential repairs needed for safety, and raining systems. Of particular note is the law for essential service repair, which requires the homeowner to be notified that work may be done without prior authorization if the essential service failure is a threat to health, safety, and comfort. The HIC spells out additional rules regarding changes to the original residential construction contract, which must be in writing (no secret handshakes allowed), and become part of the original contract. The HIC even requires certain information to be included in the contract such as completion deadline and information about the contractor’s licensing and insurance. The HIC requirements are supplemented by the Home Improvement Salesperson Registration Law, which states that anyone doing home improvement sales for a contractor must register with the state. The law prohibits contractors from using unregistered employees or subcontractors for home improvement work.
Common Pitfalls
There are many pitfalls that must be avoided if the parties are to have any hope of avoiding construction litigation over their residential remodeling contract. As with so many other issues in life, a little forethought goes a long way toward a positive outcome for all.
First, while the contract itself should be specific and detailed, if the contract is unclear or ambiguous, then the construction process will inevitably have hiccups. For example, if the contract states that the windows must be replaced, does that mean the windows themselves, the window frames, both the windows and frames, or any and all parts of the window as it existed initially? Someone could easily lose a lot of money in this case when they assume that the windows are being replaced and come to find that the frames are not part of that replacement. When the windows are replaced and the frames remain, one party has the new windows whereas the other has an empty frame with no glass. A very costly mistake to say the least.
Secondly, often times contracts are unclear about how to make a claim under the contract. Sometimes it will state that a "claim" is any claim or dispute that arises out of the contract. Conversely, there may just be a phone number to a secretary to call if there are issues. Well, she doesn’t always answer the phone. Further, attorneys can be very expensive and, at some point, many people will just want to sue.
Thirdly, some contracts limit the owner’s remedy to a return of the owners payment or some fixed amount. This is rarely a good outcome . Sometimes there are circumstances where this may be acceptable, such as the owner was a jerk and the contractor performed substandard work and deserves to get paid for the materials and labor expended. However, this is not the situation the vast majority of the time, and limiting the potential recovery to only those amounts is not acceptable.
Fourth, contracts may also state that an arbitrary party will decide the construction disputes. The basic premise of this is that the parties may agree on the dispute and then submit it to an arbitrator or some other person to avoid litigation and the costs and delays associated with it. In most cases, these provisions do not require the parties to exhaust their remedies before they can file suit in court. That is not to say that an arbitrator is not a proper remedy for a construction dispute, just that contracts that attempt to require the parties to mediate or arbitrate before bringing a lawsuit is potentially void and against public policy under Florida law.
Lastly, many construction contracts contain clauses that state the owner agrees to waive any mechanic’s lien claims against them by the contractor. This waive of mechanic’s lien rights is an attempt to shift the risk of nonpayment away from the contractor and onto the person paying for the work. This term is clearly against public policy and void as a matter of law under the Florida Construction: Lien Law if the entire contract is owned by the homeowner and not financed in whole or in part by an outside source.
Tailoring your Construction Contract
While a sample residential construction contract can provide a good basis for your own contract (although beware of using one that looks too old), there are portions of it that require additions and deletions or revisions to fit your project. For example, if the subcontractor is going to be purchasing materials, you will want to delete a provision that requires that the contractor do so. If the subcontractor is going to be working on an hourly rate or by the project, add a provision stating the hours to be worked or materials and labor to be supplied. If you are not going to be paying $100 per day for completion, buy that provision.
Add a protective clause called a "limitation of liability." These clauses are strictly construed, so make sure it is written narrowly to protect your specific project, such as: "regardless of whether the breach was based on contract, warranty, negligence, strict liability in tort or any other legal theory, in no event shall contractor’s liability exceed two times the amount which the contractor is to be compensated under this agreement." While this may not seem like an appropriate provision for a residential construction agreement, it is very helpful to contractors to avoid mildew claims or claims for cracked foundation that are not related to the work performed by the contractor.
And, of course, pay attention to the unique provisions that you already wrote in. Did you require that the subcontractor warrant only a foundation and no other part of the project? Include that exclusion in the sample residential construction contract to avoid a conflict.
Many general construction contracts require the use of subcontractors. This is not unusual. Subcontractors will usually be using their own employees. However, it is also important to note that many of these subcontractors supply their own materials. Does that raise the costs? Yes. Will it in the end save the general contractor money on the job? Probably, so when looking at the costs, even if the number looks high, it may end up saving the money in the end with fewer change orders or added costs due to badly installed work.
Engagement of Counsel
Your lawyer is an important part of obtaining your municipality’s building permit before engaging in residential construction or renovation work. The lawyer will ensure that the residential construction contract meets your best interests and that appropriate provisions are included which allow for the proposed project to be properly completed. Recent case law suggests that these sorts of provisions may include topics like design, what items will be approved by the town’s building department, criteria regarding payment, and appropriate time frames.
A lawyer should be consulted if you need to consider the following:
a) if the contract is fair as your interests are concerned;
b) if the contract is in accordance with current law and normally accepted practices;
c) if it is clear what will happen if you and the other party cannot reach agreement on something;
d) if you have sufficient time to properly consider the contract and obtain legal advice before you sign;
e) if there are any financial obligations you are not aware of;
f) if it is clear who is responsible for different aspects of construction;
g) if it is clear who is responsible in the event of any problems or additional costs;
h) if it is clear who will be responsible for future costs of maintenance , repair or replacement; and
i) if it is clear who will be responsible for default of contract terms.
During these extraordinary times, municipalities have not been able to meet at regular intervals. In order to begin your construction as soon as possible, it is a good idea to consult a lawyer as early as possible after you have been given a building permit. The lawyer will review your example contract and then prepare a completely new contract or only add new clauses to existing contracts that could be prepared by you or the contractor. The goal for your lawyer is to ensure that the terms of contract are such that you can start your project as soon as you have met all the conditions of the building permit.