Making Sense of Residential Construction Contracts

What Constitutes a Residential Construction Contract?

A residential building contract is a key part of a home or unit construction project. A residential construction contract can be either written or verbal, however nearly all contracts for building a home will have at least some writing which lays out the terms and conditions of the relationship between the builder and the owner.
The most important aspect of a residential building contract is the scope of works – usually known as the "Plans and Specifications". Often contemporary contracts will be based upon some standard form such as the HIA or CCF Home Building Contracts. However the scope of works should also include the agreed price for the work to be done, the price for any variations, the date of practical completion, the date for payment and how variations and disputes will be dealt with . A Standard Form Contract should be therefore carefully reviewed to be aware of the specific terms of that Contract.
The Terms and Conditions of a Contract will often also refer to other documents. These will often include the following:
Before you enter into a Building Contract you should ensure that you understand the Contract Terms and Conditions as well as any Plans or Specifications referred to in the Contract. You should not enter into a Building Contract unless you understand the terms….and that you are prepared to honour them. The ownership of the "Plans and Specifications" will generally be retained by the builder. If you require your own Certification or Plans prepared (rather than the Builders) then you must arrange this separately with the builder to ensure that the Contract makes special provision for this.

Core Components of a Residential Construction Contract

Regardless of the size of your project, the contract you enter into with your builder will generally describe the project scope, the payment terms, the expected commencement date and the completion date and the respective responsibilities of the owner and builder. An outline of these elements are provided below for your general information, however it is important to remember that no two projects will be the same. You should obtain independent legal advice with respect to the specific form of contract you are entering into, as there are often other special conditions that may need to be addressed.
Scope of Work
If you are constructing a new home (or even doing a substantial renovation), it is essential that the contract between you and the builder adequately describes what will be built on your land. These details are generally included in what is known as the plans and specifications. If you are not satisfied with the level of detail that is added into the contract, you may need to consider a separate building agreement outside of the HIA Standard Form of Contract which will provide more detail about the plans and specifications. It is important to remember that if you are getting a mortgage to help pay for the works, a copy of the plans and specifications will likely need to be provided to your lender.
Payments
Sometimes payment provisions can be controversial. New South Wales has certain laws which determine how and when a builder can request progress payments from an owner. Make sure that the contract includes a payment schedule. Depending on the type of works being completed, you may find that you are not in a position to make a full and final payment at the time of completion of the works (as there may still be some tasks that the builder needs to complete). The contract should include provisions regarding the final payment and any disputes over that final payment.
Time
It is important that the obligations of the builder and owner are expressed clearly in the contract, recognising that delays can occur from time to time and sometimes those delays are outside the control of the builder. The contract should include provisions regarding the works having to be completed by a particular date; the obligations of the builder if the works take longer than the expected date; the obligations of the owner if the works take less time than the expected date; and the obligations of one or both parties in the event that either of their respective circumstances change (for example, one of the parties is required to move to a different town).
Disputes
While no one ever wants to think about what may happen if a dispute arises, it is important to understand what dispute procedures are contained in the contract in case you do need to make use of them. For example, the dispute procedure may require mediation before any court proceedings can be commenced. In some contracts, the builder may be able to commence court proceedings directly (without first going through mediation). Sometimes it is simply agreed that a matter will be referred to adjudication.
It is important to remember that the above is only a guideline and that it is always sensible to obtain legal advice on the terms of a contract before you sign it.

Typical Clauses Found in Residential Construction Contracts

Contracts often contain amendments that, like the initial contract, spell out specific rights and obligations of the parties. Change order provisions, for example, are common in construction contracts. These clauses state some version of "no changes shall be made in the work unless authorized in writing by the owner or its duly authorized representative". Change order provisions usually also set out who gets to determine "duly authorized representative" and further state that "change orders" and "extra work" means "any work not identified in the Plans and Specification specifically authorized by Owner or its duly authorized Representative." The moral of the story is that any change in the work must be in writing in order to be binding.
An area where disputes commonly arise is when a property owner is forced to hire a contractor to finish shoddy work done by an "authorized representative." This can lead to ugly disputes between Owner and its representative since it is usually cost prohibitive to retain two different contractors to do the same job. Dispute Resolution clauses in residential contracts vary widely. Some work with the American Arbitration Association; others require mediation, and still others require arbitration with a specified forum.
Like many "catch all" provisions, Dispute Resolution clauses typically require submission to mediation prior to litigation before a court of competent jurisdiction. Typical clauses state that the "Owner and Contractor agree that any claim arising out of this Agreement, shall, at the option of Owner, be submitted to mediation prior to being filed with a court or an arbitrator." The agreement went on to specifically state the "Cost of mediation and the apportionment of the mediator’s fees and expenses shall be shared equally between Owner and Contractor".
Another common "catch all" clause is the Warranties clause. Like Dispute Resolution provisions, these are often stated as "no bigger than a ticket purchase agreement or warranty" and are usually set out at the end of the contract. A typical Warranties provision will state something like the following: "Contractor warrants that its work shall be free from any defective materials and/or workmanship and all other defects and conditions contrary to the Contract Documents for a period of one year after the Date of Substantial Completion or final inspection by the City or County when no date of Substantial Completion is named in the Contract". While the clause may be very general in nature, courts have been willing to police these clauses with regard to the industry standard for construction.
Finally, termination provisions typically state that the contractor or owner can terminate for certain reasons including failure to complete the project, unlicensed contractor, failure to pay subcontractors, etc. Some termination provision intend to address reasons for contractor termination only and state that the contractor’s right to terminate is "in addition to any other right or remedy provided in law or equity." Some termination clauses simply state that contractor is entitled to liquidated damages; however, the time within which the contractor has to provide written notice of breach is often only days. This is one of the reasons why it is essential to be careful when entering into a residential contract.

The Basics About Legal Responsibilities and Rights

Understanding Legal Obligations and Rights of the Parties
As with other types of contracts, there are rights and responsibilities that are inherent to residential construction contracts that have been established by law. These rights and responsibilities balance the interests of homeowners and contractors to ensure that residential construction projects are completed fairly, efficiently, and to the satisfaction of both parties.
Obligations of Contractors
Under a basic residential construction contract, a contractor is typically required to:
Obligations of Homeowners
Homeowners must similarly adhere to various requirements, including:
Compliance With Local Building Codes and Regulations
Both homeowner and contractor must ensure compliance with local building codes and regulations, which are generally established by city and county officials and overseen by local building departments. These building codes establish enforceable minimum standards for the construction of buildings and structures within their jurisdictions, which are designed to uphold the integrity and safety of these buildings and structures. Compliance with these codes is non-negotiable and includes adherence to established standards for plumbing systems, electrical systems, heating and air conditioning systems, fire prevention systems, and accessibility requirements, to name a few.
It is important to note that the codes and regulations that apply to a residential construction project do not automatically apply to renovation projects. In other words, even if a homeowner is renovating an existing structure, the building codes that apply to new construction may not apply to the renovation. This is especially true if the renovations underway are not structural in nature.

How to Negotiate a Residential Construction Contract

Negotiating a Residential Construction Contract is essential for both parties to ensure that the terms adequately provide for a fair and equitable agreement. Whether you are a homeowner or contractor, you need to look at each specific term in the contract to see how it may affect you. Many of these items can in fact be negotiated.
• Review the Contract as a Whole – Contracts are often long, complex documents filled with insider jargon.
• Ask Questions – Anyone entering into a contract should always be asking questions. For example, you may want to know why the contract calls for materials to be provided "according to the Manufacturer’s specifications" when a Contractor is rarely held to any standard other than "workmanlike" standards.
• Down Payments – In many cases, it is better to pay for materials first, or as materials are ordered, than to put a large down payment on the contract . Many contractors requiring a large down payment have been known to not finish the work, even though the homeowner has paid for the materials and labor.
• Confidentiality – The contract will likely include details of your personal finances and private information. Neither party wants the contract disclosed to third parties who may use this information improperly. A confidentiality agreement is a must in these situations.
• Permits – The contract should say who is responsible for obtaining permits. Usually, it will be the contractor, but never assume that. You do not want to be responsible for something that you did not know you were responsible for.
• Time – time is important to almost everyone getting a remodel. You should know how long the job will take, and what will be done in case of delays.

Common Pitfalls in Residential Construction Contracts

It does not matter if you are a first-time home builder or a craftsman who has been building houses for years; you could be making construction contract mistakes that could get you sued or even cost you your business. Some of the most common mistakes for residential construction contracts, which can lead to lawsuits, are discussed below.
Most Likely To Get You Sued (Or Worse!)
Business Without a License – It is illegal to enter into a contract without a license, yet many people do it anyway. The penalties vary from state to state. In most states, it can mean criminal penalties; in others, you could be banned from future work in residential construction. In some states, you do not have to have a license to build a new home. Obligations Under Residential Property Code – When you sign a contract, you are standing by the obligations binding in your state. For instance, in Maryland where we practice, a contract is deemed to include the Residential Property Code requirements, even if they are not specifically mentioned in the contract itself. This means that you, as the builder, are still held to the obligations and the homeowner may be able to bring a lawsuit for breaches of those obligations. If you obtain a license, make sure you understand your obligations under the law in your state and abide by them. Most builders think about their obligations to the homeowner, but may overlook that this duty goes the other way as well. Conversely, if you are a homeowner, you should consult with an attorney about your rights under the law. Otherwise, you may be stuck with a binding agreement without knowing what it means.
Most Likely to Get You Sued (Or Lose the Case)
Readability – A residential construction contract should be easy to read for both parties. Both parties should understand what the contract says and what each party’s obligations are. Deficient Requirements – A lot of residential construction contracts are bare-bones and leave a lot of things open to interpretation. But, trying to cut corners without taking the time to do the projects right can simply delay your progress and cause problems for your business. Inadequate Protection – A bridge will not be built without properly engineered plans and a permit. Similarly, a poor residential construction contract will only get you in trouble. Construction contract mistakes are usually between the homeowner and the contractor. But, these mistakes could also serve as a reason to introduce an attorney into the dispute. A residential construction lawyer can help pinpoint problems you have had with a use of a construction contract in the past to help you draft a better contract for a new project. It is also a good idea to speak with a construction contract lawyer if you are considering suing a builder under a construction defect on a project. An attorney will be able to help identify which of your rights have been violated.

What to Do to Resolve Disputes in Residential Construction Contracts

In the event of a dispute related to a residential construction contract, the contractor may terminate performance if the homeowner fails to pay for work completed in accordance with the contract. Even if a contractor is justified in terminating, they should be mindful of many policy reasons (including their insurance contract) that discourage termination of agreements as a first step in resolving disputes with customers.
If a homeowner is unhappy with construction or believes that the contractor is not performing in accordance with the contract, that homeowner should immediately discuss their concerns with the contractor. If the homeowner and the contractor cannot agree upon the issues , either party may take the further step of mediation. Mediation is a non-binding process whereby both parties agree to try to resolve their differences with the assistance of an unbiased third-party who acts as a facilitator. If both parties agree to the terms of the resolution, then it is memorialized in writing to be signed by each party. Arbitration is another option that may be available, depending on the terms of the contract. In arbitration, a professional arbitrator hears both parties’ claims and renders a decision. Such decisions are also non-binding and may be subsequently challenged in court, much like mediation. Both mediation and arbitration are generally far less expensive and require far less time than a court proceeding.