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12 Steps to Running a More Successful Contracting Business

Important Matters for Property Owners Working with Contractors

Important Matters for Property Owners Working with Contractors

by GARY RANSONE

Phase 1: BEFORE THE PROJECT STARTS
Phase 2: DURING THE PROJECT
Phase 3: WHEN THE WORK IS NEARLY COMPLETE

PHASE 1: IMPORTANT MATTERS THE OWNER SHOULD CONSIDER
BEFORE THE PROJECT STARTS:

The preconstruction planning phase is in many ways the most important part of the project for the owner. This is the time where many of the most important preventative legal steps will be taken. Consider taking the following steps:

Step 1.
The Importance Of Good Detailed Design Work
Don't scrimp on your design fees and advance planning! Unless you are entering into a Design-Build Agreement (which is a more complicated and risky type of construction agreement and often not subject to a fixed price), make sure you have a good, fully detailed set of plans and specifications. The better the planning, the better the project.

Be sure you have a good, detailed agreement with your design professional that spells out just how much detail he will give you for a stated price.

Step 2.
Steps To Take During The Bidding Process
Ask around for quality builders who work competitively and furnish GOOD VALUE for a fair price. Always use licensed contractors to perform the work! Seek value, not just a low price. Competitive bidding with 2 or 3 contractors that each give you a fixed price bid is usually a good approach.  

Prequalify the contractors who are bidding your project. Require references, evidence of proper Worker's Compensation insurance and Comprehensive General Liability insurance in occurrence form, and evidence of current state licensing (if applicable to the state that you live in) and a valid contractor's state license bond (if applicable to the state that you live in). Require that any subcontractors also meet the same requirements that you place on the general contractor that will perform the work. Be careful about being an owner/builder. This requires some experience and mistakes made in this area can be quite costly.

Have a construction agreement prepared and ready to go (or at least reviewed) PRIOR to the time you are ready to award the contract to the contractor that you select to perform the work. There are many clauses that protect the owner’s interests that should be placed into your construction agreement.

Step 3.
Research Your Contractor
Obtain Information From The Contractor's State License Board (if one exists in your state): In California, you can call 1-800-321-CSLB and obtain information on the contractor status from the Contractor State License Board's automated phone computer system or you can verify the license and complaint history of a contractor online. Both verification systems are extremely informative and very simple to use. Don’t make assumptions – do your homework about the license status of contractors that may work on your project.

Step 4.
Check Your Own Insurance For The Project
Prior to signing a contract for work on a new house, larger addition, or commercial project, contact your insurance company and let them know what type of project you are undertaking and ask them for a recommendation on what type of additional insurance (if any, perhaps “course of construction” or “builders risk”) you should purchase to properly insure yourself during the project. With new construction and many larger remodels and additions, your agent may recommend a "Builder's Risk" of "Course of Construction" policy. The owner typically pays the cost of this type of insurance on the project.

Step 5.
The Importance of The Construction Agreement and Who To Enter into Contracts With

Don't underestimate the value of a good construction agreement. It will be the "road map" that guides your business relationship, the vehicle that often controls the disbursement of your construction funds, and the primary method by which you address, resolve and assign the sometimes hidden risks associated with your project.

Rule #1:
Enter Into Written Agreements Before Work Commences!
Notwithstanding the ultimate importance of mutual trust and respect between the owner, contractor, and design professional, the owner should utilize good written agreements with all the parties working on the project. This includes the design professional, contractor, and any subcontractors hired directly by the owner (be careful about directly hiring subcontractors when you have a general contractor running the project).

Rule #2:
Be Careful About Being Your Own General Contractor
Keep in mind, from a legal perspective, having one general contractor who is responsible for most all aspects of the construction project (and all subcontractors and material suppliers) is preferable to the owner having multiple construction agreements with numerous different subcontractors and suppliers.
Where a general contractor is responsible for the entire project, if a problem later develops with part of the finished project (such as a construction defect or a subcontractor's failure to pay a supplier that results in the recording of a mechanic's lien against your property), you have "one stop shopping" and responsibility. The buck stops with the general contractor who will ordinarily be primarily responsible for initially addressing and perhaps correcting the problem, depending upon the cause of the problem.

Rule #3:
Don't Underestimate the Importance of Who Furnishes the Construction Agreement
Your goal should be to sign a detailed construction agreement that fairly allocates risk between the parties. However, the owner can be in a better position if the owner furnishes a well drafted construction agreement, rather than signing the contractor's agreement. Where the owner furnishes the agreement, contract clauses can be inserted that specifically address the risks and needs the owner faces on the project. This is always a matter of negotiation.

Where the contractor furnishes the agreement, the interests protected may largely be his own, or the agreement may not contain sufficient detail to adequately address many important aspects of the business relationship from the owner’s perspective. It all depends upon the agreement. Some are rather fair, some grossly protect and are excessively hard on the contractor and others grossly protect the contractor and are grossly unfair to the owner. Ultimately, a comprehensive construction agreement that fairly allocates risk between the parties, regardless of who furnishes it, is the best type of agreement to use. The question is – are you able to evaluate and assess where the agreement falls on this scale?
If you sign the contractor's agreement, make sure you understand it first. Make sure it's in plain English, or in your primary language. Be sure it does an adequate job of addressing the owner's risks, not only the contractor's risks. Also, make sure the contractor's agreement addresses the small details that are important to you. If the agreement is not comprehensive, descriptive, understandable and acceptable to you, DON'T sign it, start negotiating and demanding more detail in the construction agreement!

Typically most owners want to enter into what's referred to as a fixed price or lump sum agreement where the contractor agrees to furnish all labor and materials for a stated amount of work in exchange for a stated sum of money. Beware of Time and Materials or open ended Cost Plus agreements. They can easily lead to disputes.
You basically have several options when it comes to how to handle the construction agreement.

First
You can furnish your agreement to the contractor to sign however, you are well advised to obtain some legal assistance with this option.

Second
You can review and then sign the contractor's agreement.

Third
You can review the contractor's agreement and negotiate additional clauses you want him to put in his Agreement.

Fourth
You can draft (or have your attorney draft) and attach an addendum to the contractor’s agreement that controls and supersedes certain clauses in the contractor's agreement. This addendum should include specific terms and conditions that better protect and more fairly address the owner's interests. After signing the addendum, you will also then sign the contractor's agreement. This addendum will reference the contractor’s agreement and denote all clauses struck from the contractor’s agreement and all clauses you are adding to the contractor’s agreement.

Rule #4:
Consider Having These Very Important Contract Clauses In Your Agreement

The language that follows is NOT contract language. The language that follows discusses important terms and conditions which you should consider.

Clause #1: Scope Of Work Description and Contract Exclusions
Make sure the scope of the work included in the contract is clearly defined in writing. This clear scope of work definition can come from your plans and/or from a written description that you, or the design professional or the contractor prepares. This clear and detailed scope of work description must then be incorporated in writing into your agreement if it is to provide you with any contractual security. Incorporate, describe and refer to the plans, written specifications, possibly any Invitation To Bid you may have, and any addenda by the design professional or the owner in the scope of work description section in your agreement with the contractor.

Also, insist that the construction agreement contain a list of contract exclusions so that you are very clear on what work the contractor is NOT doing as part of the contract. Often there can be ambiguity in this area where the contractor thinks he is not doing certain work as part of the contract price and the owner thinks he is doing this work. Having in writing and being very clear about what is NOT being performed is just as important as knowing what IS being performed by the contractor for the stated price.

Clause #2: Change Orders
Expect some. Budget for them. The better the advance planning and the fewer "upgrades" you make during the project, the fewer Change Orders you'll have. However, it's almost unheard of to have a project without a few Change Orders. Insist in your contract that all Change Orders be placed in writing and signed by the parties prior to the commencement of any additional work. Document changes to the specifications and finishes with a signed change order even if the contract price does not change to avoid later confusion, i.e. you change the color of the interior color from Frost, Flat finish to Frost, Satin Sheen finish. While this may not change the contract price or time to complete the work, it still is not a bad idea to document these sorts of changes in specification with a change order.   

Clause #3: Payment Schedules and Retention
The owner should consider whether the construction agreement is to require 10%  or 5% retention from all progress payments. The owner should also make sure that the contractor's progress payments do NOT pay him for more work than he has actually completed. Also, in California, by law, under nearly all circumstances, Home Improvement Contracts for residential construction work may not demand more than 10% of the contract amount, or $1000., whichever is LESS, as the contract down payment. Be very careful about large upfront down payments to a contractor before the work has been commenced. It is a bad idea to pay too far ahead for work that has not been completed. Material deposits are generally appropriate for true special order items such as custom cabinetry and other custom items and not appropriate for run of the mill materials that a contractor can buy at any lumber yard.   

Clause #4: Performance and Completion Dates
Make sure that your contract specifies the commencement and approximate completion dates of the work. Nothing is more frustrating than having no idea when a project will realistically be completed. If a Change Order changes the completion date, make sure you know how the completion date has been adjusted based on the additional time required to complete the change order work.

Clause #5: Contractor's Insurance
Require your contractor's insurance agent to issue you insurance binders for Worker's Compensation and Comprehensive General Liability Insurance with a 30 Day Cancellation Notice provision so that if the contractor's insurance lapses during the project, you will know about this in advance and can insist the contractor obtain other coverage.

Finally, request that you be specifically named "additional insured" or “certificate holder”  under the Contractor's Comprehensive General Liability policy. The binder you are sent will indicate on the face of it whether you have been named an "additional insured" or “certificate holder” under the policy. If you are a named "additional insured" or “certificate holder” you may have additional rights in the event you need to submit a claim against the contractor’s policy. All of these insurance matters should be handled PRIOR to the time work commences on the project.

Clause #6: The Dispute Resolution Clause in The Agreement
The owner should make sure all contractors and subcontractors in the construction project are bound to the same dispute resolution forum). Any type of alternative dispute resolution is initially and typically decided by contractual agreement of the parties and should be specified in your construction agreement. The benefits of arbitration vs. the court system is something to discuss with your attorney.

Clause #7: Warranty Clause
Make sure you know what is expressly warranted by the contractor and for how long. Get it in writing! If you need more information on implied at law warranties created by State Statutes, contact an attorney.

PHASE 2: IMPORTANT MATTERS THE OWNER SHOULD CONSIDER DURING THE PROJECT

By obtaining a good set of plans and having laid the proper foundation for the business relationship between all participants in the construction process through some of the steps outlined above and especially through the construction agreement, the owner is now well prepared to let the real work begin and watch his ideas and plans more successfully turn into a new space. During this second phase of your project, there are a few simple steps the owner can take to safeguard his/her interests.

Step 1:
Lien Releases
California and many other states have both Conditional and Unconditional Waiver and Lien Release forms that indicate that Contractors and suppliers have been paid for work furnished to the project.

By obtaining these properly executed Lien Releases with progress payment and prior to final payment, the owner can better insure that the money he gives to the contractor that was intended to be quickly paid to suppliers and subcontractors, actually made its way to into the pockets of those subs and suppliers.

If it did not, the owner can end up with Mechanic's Liens being filed against his property and having to pay TWICE for the same work! At the absolute minimum, insist on these Lien Releases from the contractor, all subcontractors and material suppliers with lien rights PRIOR to issuing the final payment.

Step 2:
Regular Inspections By Owner, Design Professional and Building Department
An owner who is involved with regular inspections and discussions of the work with the contractor will ordinarily enjoy a more successful project than an absentee project owner.

The owner should consider hiring the design professional to make several site inspections at strategic times during the project (e.g. prior to pouring the concrete foundation, prior to closing in the walls with drywall, at the time of the Punch List walk-through, etc...) in order to confirm the work is being performed in accordance with the plans and specifications.

Make sure the work receives regular inspections by the local Building Department. This inspection and sign-off process should happen for each and every major phase of work. The general contractor should schedule and staff all of these inspections, however the "APPROVED JOB COPY" of the plans and the inspection permit card typically belong to you, the owner, and should ordinarily never be taken from the site.

Step 3:
Obtain Legal Advice When Appropriate

Again, it's cheaper to spend a little money up-front to avoid problems than it is to dig yourself out of the inevitable stress and tremendous expense of a lawsuit or serious dispute. You may want to consult an attorney familiar with Construction Law for general consulting or contracts, or especially if troubling disputes flare up during the project. If disputes do flare up, document the dispute in writing in the form of a letter to the contractor.

Always consult an attorney if the contractor talks about terminating the contract, shuts the job down, files a mechanic's lien or stop notice against the property or project funds, or if you are even thinking about terminating the contract or refusing the contractor access to the site. Snap decisions without legal consultation can come back to bite you.

PHASE 3: IMPORTANT MATTERS THE OWNER SHOULD CONSIDER WHEN THE WORK IS NEARLY COMPLETE

When the project is nearly complete, the owner will probably sense that the planning and precautions he/she took have paid off. With the project 95% to 99% complete, there are just a few important steps to take prior to shaking hands with the contractor and releasing that final check.

Step 1:
Preparing The Punch List
This is the time when you should seriously consider having the design professional walk through the project with you as you compile the final corrective work list (or "punch list") with the contractor. Insist that this punch list work be performed promptly. This final punch list phase of the project can drag on and this ordinarily leads to frustration for the owner and contractor as well.

Step 2:
Recording A Notice Of Completion
When the project has reached the point of "substantial completion" (when the project is very nearly complete with a small corrective or "Punch List" remaining and the project is fit to be used for the purpose for which it was built), the owner may, depending upon what state the owner lives in, want to fill out and record a Notice Of Completion with the County Recorder.

In some states, a properly filled out and recorded notice of completion effectively reduces the time period in which Mechanic's Liens can be recorded against the property. Despite its title, this Notice does NOT signify that the owner is accepting the project as 100% complete at the time he signs it. The contractor will still have a legal obligation to complete all punch list work after the Notice of Completion is signed and recorded.

Step 3:
Lien Releases and Final Inspection By The Building Department
Insist on getting Unconditional Lien Releases upon final payment from the general contractor, subcontractors, and material suppliers for all work you have paid for up to the point in time when you are about to issue the final check to the contractor. Then, PRIOR to issuing the final payment, insist on getting a Conditional Lien release for the amount of the final check which is issued to the contractor. At this time, the owner should also get a signed statement from the contractor that the amount of the final check covers payment for all contract work and all additional work and any amount in dispute related to the project.

Make sure the project has been given FINAL APPROVAL by the Building Department before you even think about releasing the final check to the contractor. The conservative approach to releasing the final check suggests the owner should not release the final check until he has obtained appropriate lien releases AND 35 days have elapsed since the recording of the Notice of Completion so that the owner can verify whether or not any subcontractors or material suppliers have recorded any Mechanic's Liens against the property. You may vary from his depending upon your relationship with the contractor and the facts of your situation.

Step 4:
Operations Manuals, Product Warranties and Maintenance Instructions
Prior to releasing the final check to the contractor, it's a good idea to have the contractor furnish you with the product warranties, operating manuals and maintenance instructions on numerous products that have been incorporated into the project. These products could be plumbing fixtures, furnaces, air conditioning units, well pumps, windows and doors, floor coverings, garage door openers, fire protection equipment, roofing materials, paint materials, manufactured siding, etc...You may also request properly labeled paint samples for all colors used for future touch up painting. If you make this a requirement in your contact, the contractor will need to furnish these as part of the contract work.

The considerations that have been reviewed in this outline are NOT comprehensive and can NOT possibly address the unique and varied concerns of every owner who is approaching a construction project. However, they are merely a good starting point.

The Law Office Of Gary Ransone has prepared this outline and can provide convenient, easy access to California Construction Law information, consulting, construction contract drafting or review, preconstruction assessment and planning, contract administration, dispute analysis, and arbitration/mediation services for projects located anywhere in California. 

To obtain information about rates for legal services or additional information about services offered call (831) 476-8784.


Thanks for taking the time to review this outline. Good luck with your project!