5 Common Problems with Residential Construction Contracts
Having worked with a good number of residential construction companies over the years, we’ve noticed that there are common problems with the form contracts that contractors use. Contractors should not blindly rely on standard construction contract templates, but should put careful thought into their contracts to avoid more expensive problems down the line.
Here are the five most common issues we’ve seen with residential construction agreements and what contractors can do to fix them.
1. No Residential Builders License Number in the Contract
In Michigan, contractors performing work on residential properties generally have to be licensed by the State, as required by the Michigan Occupational Code. Contractors who perform work without a residential builders license when one is required can face stiff legal consequences. One little-known quirk to that rule is that the contractor must include information about their license in each residential construction contract it enters into. If the contractor is an individual, you need just the license number. If the contractor is a company, you need the company’s license number, the name of the qualifying officer (the individual in the company with a license), and the qualifying officer’s license number.
2. No clear change order process
Changes in construction projects happen all the time. Whether it’s because the owner changed his or her mind about something, ran out of money, or there were some unexpected problems that came up, changes to the project are almost inevitable. Problems happen, though, when you don’t have a clear process for putting those changes in writing or your employees don’t follow through on that process. The best way to address this is to have a clear procedure for writing any changes down, including both changes to the scope of work and price, and having both the contractor and the owner sign those changes.
3. Not Enough Description in the Scope of Work
The more detail, the better. If you can specify a model number, a specific paint color, a particular line of cabinets, anything that will better define what the owner is going to get, the clearer these items are and less open to debate later on. The same goes for construction plans and specifications. We also recommend that you have a clear timeline for milestones in the project, but make sure to leave yourself enough time so you don’t run over.
4. No Payment Terms: When, Where, and How Much?
Another often unclear item is payment from the owner. Not just the total amount of the project, but progress payments along the way and how much is each progress payment. There are numerous ways to set this up, as long as it is clear at what point the owner must pay and how much the owner needs to pay. Related to that, the contract should be clear on how the contractor will accept payment: check, cash, credit card, online, etc.
5. Not Having an Attorney Review
Last, but not least, you should always have your attorney review contracts. Your attorney will be aware of even more issues such as dispute resolution procedures, waivers of subrogation, insurance and indemnification, termination provisions, and a whole host of other common construction problems that are much easier to address up front than when there is a dispute.