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Construction Contract Considerations: An Ounce of Prevention is Worth a Pound of Cure.

Residential construction contracts are often form documents used by builders to express the salient terms of a construction project. It is not uncommon that these contracts are signed without negotiation. The construction contract is an essential document in the home building process and is worth hiring counsel to review the document.

Minnesota Statute 327A.02 provides relief for homeowners who experience defects in their newly constructed homes. The process is complicated and requires the assistance of an attorney. Most construction contracts contain a warranty provision as well. It is best to review the entire contract with an attorney before construction begins in order to prevent the escalation of minor problems.

Change Orders, Delays and Payments 

There are several considerations before signing a construction contract. The homeowner should know how payments are made and who is inspecting the progress of the work. The owner should also know what the procedure is when part of the project does not meet expectations or when the owner wants to make a change in the construction plans. The change order process should be understood by the homeowner.

Change order provisions should specify the process to notify the builder of any changes to the original specifications. The purpose is to provide the builder notice so it can reassess the costs of the changes. Often, changes to the plans must be in writing and signed by both parties to the contract; sometimes the writing requirement is skipped or overlooked. This may not be a concern at the time the request for the change is made the builder; however, it may be an issue if the changes are agreed upon but not executed correctly, or if there is a dispute regarding the change in cost. In a legal dispute, the construction contract will govern, and if change orders must be in writing, it will be difficult for the homeowner to prevail. Change orders must be accompanied by thorough communication. Most of the problems that arise during residential construction can be solved, or at least understood better, with thorough and open communication.

Some complications are out of any one person’s control and may delay the project. Delays are almost certain to happen. Minnesota has unpredictable weather and some contingencies just cannot be anticipated. Delays may be caused by weather conditions, shortage of materials, change orders or global pandemics. The construction contract will provide the procedures for various delay scenarios. The homeowner may be more sympathetic to a delay caused by weather or unavailable materials, but may not feel the same when the delay is caused by the builder not having enough employees to finish the job on time. These scenarios can be identified in the construction contract and provide an agreed upon remedy before the delay happens. Communication is essential during delays. The homeowner may be content with substitute materials, if it keeps the project on time. The homeowner may not want substitute materials for the countertops, and might prefer a revised timeline rather than a different product. Discussing the cause of delays and what solutions are available will be more productive than general comments about being a little behind schedule. Delays may also be caused due to non-payment because the homeowner is not satisfied. It is imperative to know whether you have the right to withhold payment from the contractor.

Payment is usually part of the construction contract or part of an escrow agreement drafted in conjunction with the construction loan. It is important to understand how the builder gets paid and when. Builders are usually paid in multiple installments, called draws, over the course of the project until work is completed. However, some builders are paid in multiple installments before the work is completed. The builder may need an initial payment to order the foundation materials and pay for excavation work. While some builders have the capital to float these costs, and get paid after each phase of the project is finished. It is vital to know exactly how the payments are made, because this will affect how much money should be reserved for the final payment. Holding the final payment of $3,000 does not provide much leverage if the builder has $30,000 of work left to be performed. The schedule of payments should be considered before signing the construction contract.

Completion and Punch Lists

Understanding how the construction contract defines completion of the construction project is also an important aspect of the agreement. Intuitively, people understand completion as when the project is completely finished. However, in construction the term substantial completion is often used, and means the building can be used for its intended purpose. Thus, the house may be substantially completed and the homeowner can move in, but there is still a long punch list.

The Punch List is a list of the final items to be completed. This may include replacing damaged pieces of trim or installing missing hardware for cabinetry. Perhaps the wrong showerhead was installed or some caulking or paint needs to be touched up. The home is ready to be lived in but there are a few items left to finish. It is crucial to maintain a positive relationship with your builder in these final stages. The better your relationship is, the more likely your builder is to return to resolve issues during the express warranty period in your construction contract.

Contact Your Local Construction Attorney

Having an attorney review the construction contract before you sign it is the best way to understand the provisions in the contract and convey to your builder that you know what you are doing. Be prepared to visit the jobsite regularly.  Consult with your attorney if problems arise.   If your attorney already knows about your homebuilding project and read the construction contract, your conversations to resolve issues will be much easier.

Adam Sullivan is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the area of Real Estate, Construction, Corporate and Employment Law. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.