Following up on my previous article's tips for clear and simple documents, let’s take a look at what makes for a thorough fixed-price construction contract. This article won’t cover everything a contract should have, but it will address elements I consider essential. The law differs from state to state, so consult with an attorney before making any changes to contract language.
1] Make sure your contract lists the property owner of record, the street address, parcel number, subdivision, assessor number, etc. The contract should be signed by the property owner, which you can verify using property tax records. Note that in Arizona you can’t apply a lien to property owned by a trust. The law may be different where you work, but it’s worth knowing what your options are.
2] List the name and page numbers of the project plans and indicate that these are part of the contract. I also provide a narrative description of the scope of work that makes it clear which rooms are affected and, equally important, which rooms are not affected. If the pre-construction planning was particularly long or complex, I sometimes list options that were discussed during the planning phase but were ultimately omitted from the contract because of the budget or for other reasons. Clients sometimes misremember decisions made along the way, and this description avoids misunderstandings about what’s included in the contract and what is not.
3] State the contract price and define the billing cycle. I recommend getting paid more often rather than less often—weekly if possible, with money down at contract execution.
4] Define the invoicing process and include a sample invoice showing typical calculations. Make sure you define the entire invoicing process, including whether or not you will supply signed lien waivers prior to the next invoicing cycle.
5] List “unknown conditions” that may be encountered on the project and explain how you will handle them. Examples include plumbing issues hidden in walls, faulty electrical or gas lines, structural issues, and other work that doesn’t meet safety standards or building codes. To keep small surprises from holding up the work, consider including language that allows you to resolve issues up to a specific amount. For example: “Any unknown, hidden condition encountered by the contractor may be resolved without written permission of the Owner if the expense (cash cost) is $500 or less.”
6] Define allowances and explain how you will determine the final amount charged against an allowance. Again, an example will help. (I will have more to say on this is a future article.)
7] Define how you will handle additional work orders and change orders, including how the cost will be calculated and when it will be paid. I collect small amounts up front; for larger changes, I usually ask for half upon signing of the change order and the balance due with the next draw.