Winter Park Home Magazine - Issue 2 2014
There are many high-quality contractors in Central Florida that do an outstanding job, building beautiful homes. They try to get their projects finished on schedule and within their client’s stated budget, as they know that their hard-earned reputations are on the line. However, given the complicated nature of construction, some of the best laid plans can go astray. Here are a few tips for protecting the homeowner’s interests in construction contracts.
Define the Scope of Work. The contract should be as specific as possible about what the owner is paying to have built. That may seem obvious, but contracts can be surprisingly vague. The contract should expressly incorporate the final set of design documents that are going to be submitted for the building permit.
Payment Structure. It is increasingly common for contractors to propose that the homeowner pay them on a “cost plus” basis, i.e., the homeowner reimburses them for their costs plus some percentage mark-up. With this approach, the homeowner cannot rely upon any cost estimate that may be stated in the contract. The contractor has no obligation (or even financial incentive) to keep the price within that estimate. From the homeowner’s perspective, the better approach for keeping the project within budget is to negotiate a lump sum price. But, the homeowner will need to decide the project details before contract signing and then guard against changing their mind during the job. While the homeowner can still change the project design under a lump sum contract, the contractor will justifiably require a change order to do so - typically at a premium.
Progress Payments. The contract should provide guidance on the amount of each progress payment until project completion. The contract should allow the homeowner to withhold enough unpaid contract balance to cover the cost of a replacement contractor if, for whatever reason, the original contractor is terminated. To accomplish this goal, the contract should include a “schedule of values”, which is a break-down of the lump sum price allocated for each of the major work items (e.g. foundation, rough carpentry, electrical, etc.), equating to the value of those respective work items. Each month, the contractor should get paid a percentage of the amount allocated for each of the work items based upon the work actually performed.
Protection Against Liens. Even if a homeowner pays the contractor every dollar owed on the project, if that contractor fails to use those funds to pay all of the material suppliers and subcontractors, the homeowner could end up paying twice for those materials and subcontractor services - plus their attorney’s fees and costs. And if you don’t pay, you can lose your house. It’s harsh, but it’s the law. The good news is that Florida’s lien law provides specific procedures for homeowners to protect themselves against such liens. Briefly, the homeowner needs to condition all progress and final payments on receipt of lien releases from all potential lienors. There are additional steps to take as well, and homeowners are strongly encouraged to contact their construction lawyer prior to contract signing to make sure that the contract will require the contractor to follow all of the procedures that will guard against liens.
Project Schedule. Perhaps the biggest complaint by homeowners is that the project takes longer than expected. If the delays were caused by things beyond the contractor’s control, such as a hurricane or multiple changes requested by the homeowner during the project, this is excusable. But, if that is not the case, then the contract should give the homeowner the right to terminate their contractor if the project is taking an unreasonable amount of time to finish. To establish that right, the contract should establish a firm substantial completion deadline (e.g. a certain number of days after the permit is issued) and specifically state that “time is of the essence” with respect to that deadline.
Insurance. The contractor should provide the homeowner a Certificate of Insurance reflecting that he has Comprehensive General Liability Insurance and Workmen’s Compensation Insurance. The contract should condition payment upon the contractor furnishing that Certificate of Insurance and keeping the insurance in force through final completion.
Attorney’s Fees. When projects do not go as planned, a lawsuit could result. If it does, the contract should provide the homeowners the right to recover their attorney’s fees if they win. If the contract is silent on attorney’s fees, it can create an unfair advantage for the contractor because if the owner breaches by failing to pay amounts due, then the contractor can lien the house and sue under Florida’s lien law, which provides a statutory right to recover attorney’s fees for the prevailing party. However, if the contractor breaches the contract by performing work defectively or delaying the job, the homeowner does not have any right to recover attorney’s fees unless the contract expressly authorizes it. So, unless the contract includes an attorney’s fees provision, the contractor would have an unfair litigation advantage.
Conclusion. This article discusses only a few of the issues to be addressed when reviewing a construction contract from the perspective of the homeowner. It is strongly advisable to retain the services of an experienced construction attorney to guide you through the process – not only for the negotiation of the contract, but also as a part of the team to help through the issues that might come along throughout the project.
Frank and his wife, Joan, have two daughters. They have lived in Winter Park, Florida since 1980. Joan is a retired Speech Pathologist. Their older daughter, Allison, who is a mixed media artist, lives in Venice, California and is a 2007 graduate of Hamilton College, graduated from Parsons The New School For Design with a postgraduate degree in Graphic Designs in 2008, and received her Master of Fine Arts in Electronic Media Arts and Design from the University of Denver in 2010. Their younger daughter, Rachel, who works at the Aspen Institute, lives in Washington, D.C. and is a 2011 cum laude graduate of Hamilton College and received her Master of Arts from Georgetown University in 2013.
