Top 7 Tips for Custom Builder Contracts
When it comes to having a custom home built, the opportunity to customize every aspect and element of a home can be both a rewarding and overwhelming experience. It most cases, the experience will also depend greatly on the terms and conditions of the custom builder’s construction contract. Unfortunately, consumers tend to overlook the critical aspects of the builder’s construction contract, as they have a good personal rapport or high level of trust with the builder that feels good at the time of contracting. The relationship and trust with the builder is important, as the builder is, after all, building the consumer’s dream home and will likely be engaged for at least a year during construction. However, having a custom home built requires that the construction contract be reviewed and modified to ensure adequate protections for the consumer. Ultimately, custom home builders are very sophisticated and experienced in the issues and problems that are likely to occur during the construction process. Nonetheless, custom home builders, unlike production home builders, tend to show much greater flexibility in amending the terms and conditions of the construction contract. In this regard, the following are the top 7 tips that should be considered as part of the custom home builder’s contract negotiation:
Clear Scope of Work – One of the basics of any construction contract is to be sure that the scope of work clearly outlines what work is to be completed. With respect to a custom home, this should include, at a minimum, reference to the work necessary to complete the home in accordance with the plans and specifications of the architect. When the scope of work under the construction contract is clear, there will be no confusion or uncertainty at the end of the construction project as to the deliverable from the builder.
Breakdown of Costs to Complete – It’s important to understand how much the home will cost to complete and how the builder gets paid. There are a few types of construction contracts, (i) fixed price contract (specific dollar amount to complete the work), (ii) a cost plus contract (all costs to construct plus a percentage profit for the builder), and (iii) a cost plus contract with a guaranteed maximum price (cost plus contract, but capped at a fixed amount). Regardless of the type of contract utilized, the contract should be supplemented with a breakdown of the expected costs to complete the work (also referred to as a schedule of values). A breakdown of the costs to complete the work provides an opportunity to check the builder’s cost structure under a fixed price contract and avoid confusion on the types of costs that can be passed along under a cost plus contract.
Completion Deadline and Delay Damages – It is very important for the builder’s construction contract to have a completion deadline and damages payable (or credited against remaining amounts) from the builder for being late on completion. The objective here is to not squeeze the builder into a deadline that is not practical or reasonable, but to put some line in the sand to set expectations of a completion date. By way of example, if the builders suggests that they will need 12 months to complete the work, then a completion deadline of 14 months may be appropriate. Ultimately, the consumer just needs to have some expectation that completion will occur by some date certain or the builder will be paying for the delay.
Builder Home Warranty – Builder warranties are typically subject to several conditions that all operate to minimize the builder’s obligations to correct or remedy defects in the home following completion of the work. The end goal with builder warranties is to ensure the builder will stand behind its workmanship and correct defects in the home. The good news is that custom home builders rely heavily on word of mouth and reputation with respect to their craftsmanship and quality, so builders are typically receptive to correcting and remedying matters that could tarnish or harm their reputation. Nonetheless, it’s best to ensure the construction contract provides clarity on the obligations of the builder to correct or remedy work that is not satisfactory to the consumer.
Final Payment and Substantial Completion – Final payment and substantial completion generally go hand and hand under the builder’s construction contract, as substantial completion usually dictates the stage at which final payment is due. Tying these two concepts together will be critical to ensuring that the consumer has leverage to require the builder to complete any remaining punch-list or final details with the home prior to demand of the final payment. The starting point is to ensure that the requirements and conditions for final payment are clear and the definition of substantial completion means a fully completed home ready for occupancy and enjoyment.
Holdback of Funds – Having the ability to retain or hold back (also called retainage) some portion of the cost of the work can be a powerful tool to keep the builder focused on completing the home timely and as required by the construction contract. The amount of the hold back until the final payment is due can vary, but the objective is to retain some carrot to incentivize the builder.
Termination for Convenience – This is probably the most consumer favorable provision, but one that can be a very helpful right to the consumer should the builder relationship breakdown or fail entirely. The idea is to have the ability to terminate the contract and only pay the builder for the work actually completed up to the date of the termination. This allows the consumer to bring an end to a relationship with the builder, regardless of the reason or the desire of the builder to continue.
While the relationship and trust with a custom home builder is important, it should not override the need to have a real estate attorney assist in the review and modification of the builder’s contract. Creating clarity on the obligations of the custom home builder will ensure that the consumer’s expectations align with the outcomes under the construction contract.