The Fundamentals on Contracts Between Homeowners and Contractors
A homeowner and contractor agreement is a written plan that defines the parameters of a sales agreement between the homeowner and the contractor (or home improvement contractor) providing construction and/or other home repair services. While some states require written contracts for various types of construction projects, it is helpful for homeowners to have a written agreement for anything beyond routine repairs or maintenance.
An agreement between the contractor and the homeowner provides a specific outline for what will be covered depending on the scope of the project. Without a written agreement, such disagreements can lead to legal actions or other conflict resolution processes. When parties have a clear understanding of what is included in a project and the associated costs, it helps to prevent the need for future litigation.
There are two fundamental fields of construction project in which homeowner and contractor agreements are commonly used. These include the following:
Painting and Home Repairs Some of the most common forms of construction and service projects performed in the United States include handyman home repairs , interior and exterior painting, and services such as carpet cleaning. For many of these projects, a written agreement may not be necessary because both parties will have a clear understanding of the job. Many contractors draw up a written estimate with a quote for the work that needs to be done. If a person or business refuses to pay for reasonable and necessary art supplies, such as paint and tools, the courts may enforce a lien on the real estate. However, written agreements are still helpful to prevent misunderstandings.
Plumbing Plumbing services can be complicated, especially when it comes to determining the extent of the damage, the scope of the repairs, and the costs involved. Having a written agreement with a plumber or home services provider puts both parties on the same page before performing any work. This enables the contractor to recover unpaid estimates due to unforeseen circumstances.
Whether a homeowner and contractor agreement is required by law or not, it is always a good idea to have a written agreement with any contractor performing work on your home.
What to Include in the Agreement
When entering into a contract with a contractor, a homeowner must be aware of several key elements that should be included in any agreement. While your specific contract may not contain all of the elements listed below, it is critical to at least know what they are and discuss them with your contractor. First, identify the scope of work to be completed by the contractor. This should include everything from the type of work to be done to cleaning up the job site when the contractor finishes. Homeowners should be absolutely positive that they agree with the scope of the work described in the contract before entering into any agreement. If the contract does not perfectly depict the scope of work, and you think you have a verbal agreement with your contractor regarding the omitted portion, you may run into trouble down the road, particularly if the contractor’s error is based upon his verbal misrepresentation of the scope of work. Second, state how and when payments will be made to the contractor. In addition to payment amount, specify whether the payments will be made at the start, middle or end of the job. Contracts should also specify who is responsible for purchasing products and what allowances have been agreed upon. In many cases, the consumer is responsible for purchasing ceramic tile or fixtures for bathrooms and kitchens. Any other resources used for the job itself such as plumbing products or lumber should also addressed. Third, a contract should identify the time frame in which the project will be completed, with particular deadlines for certain aspects of the work. It is important to specifically list all deadlines for both you and your contractor. A contractor should have a clear understanding of his responsibilities and the specific time frame for completion. Finally, your contract should list the responsibilities for both you and the contractor. Homeowners should specify whether they or the contractor will handle permits and inspections. It is also important for consumers to know whether they are expected to purchase the materials that will be used in construction. It is critical that you review these and unrelated clauses in your contract before entering into an agreement with a contractor. Remember, bad contracts can equal bad experiences.
Legalities and Regulatory Compliance
Homeowner or contractor agreements should also account for what licenses are required for your project and who is responsible for ensuring the project has the appropriate licenses before work begins. Before hiring a contractor, homeowners should determine whether the company they’re considering hiring is appropriately licensed, as required by law. The licensing requirements may include the general contractor and the subcontractors for each part of the project. Homeowners should contact their states’ licensing authority to verify that a contractor is licensed as required.
Permits may be required for different purposes and in different situations. A permit may authorize the holder to operate a business, provide a service, make repairs, or apply modifications to something such as a physical structure. Commonly, permits are required for contractors to be able to perform their work. For example, the contractor may be required to obtain a permit and pay the associated fee for the use of public property, if the project requires access to or use of the public sidewalk or street. Additionally, some construction codes require a permit is obtained prior to beginning work. These may include building permits, plumbing permits, electrical permits, or mechanical permits. Before starting work, homeowners should determine whether a permit is required for the project.
Contractors are often required to have a number of insurance policies depending on the size and scope of the work they will be performing. Some examples of insurance policies they may be required to have are general liability, professional liability, and workers’ compensation insurance. Similarly, there may be insurance requirements for homeowners. Regardless of whether a home or a property owner is legally required to have insurance, they should consider having appropriate insurance in place to address certain risks they may face. In this situation, homeowners may consider obtaining home insurance, flood insurance, or health insurance to address these and other potential risks.
Failure to follow the legal requirements, or achieve compliance with applicable rules, regulations, and laws when entering into homeowner or contractor agreements may leave one or both parties vulnerable to lawsuits. That’s why it’s important to understand the legal requirements that may apply to their agreement.
Drafting a Succinct Contract
A practical contract should be easily understood by both homeowners and contractors. All parties should understand their rights and obligations under the contract so they can perform effectively and live up to the terms of the agreement. If the terms are not clearly stated, the parties may arrive at different interpretations of the agreement’s meaning—creating the potential for disputes.
Unfortunately, standard form construction contracts are often written in legalese. Where possible, businesspersons should modify standard agreements to eliminate complicated language and to clarify ambiguous terms. Construction contracts that are too detailed—in an attempt to anticipate and address every potential issue—can lead to disputes as contractors and homeowners interpret the murky provisions in different ways. A better approach is to include fewer terms and to define each of them explicitly. In the case of unforeseen circumstances, contractors and homeowners can address and resolve these disputes directly with the satisfaction of both parties while avoiding the delay and expense of litigation.
If you review your contract and are uncertain about the interpretation of a certain provision, even if you think it’s an unimportant detail, you should consult an experienced New Jersey construction law attorney. In the event of a disagreement with your contractor that requires litigation, the contract will serve as the groundwork for your case and will largely determine the judge or jury’s decision in the dispute.
The Do’s and Don’ts
Common mistakes can derail even the best construction projects. A common mistake I see time and again is a failure to accurately and thoroughly describe the work to be performed. In my experience, both homeowners and contractors often think that they know what the other is talking about. In reality, a lot of the time they don’t.
I’ve seen multiple cases in which "complete" is used as a catch-all term to convey the parties’ intent. Usually, however, "complete" is not so black and white. Each party may have their own interpretations of the term. And that’s when the problems arise. For example, I’ve had clients ask whether their contractor was responsible for removing the trash out of their yard if the contract did not specifically mention such a requirement. Of course the contract did not contain specifics as to what should be removed . At trial, I had to argue with my client that "complete" did not mean they were entitled to a maid service with the job. If a contractor charges $100,000.00 to build a swimming pool, you’d expect it to actually be built, right? Wrong. The contract may state that the homeowner is required to keep consistent water levels in the pool during construction to avoid "shrinkage." Other contracts prohibit pool construction during the winter months. You may be entitled to the $100,000.00, but you may never get the pool you paid for, because you didn’t have complete performance and timely delivery of the work under the contract. So make sure you know what you are agreeing to. When drafting a contract, or sending requests for explanations from a contractor, be as specific as possible. Make sure to include all details regarding the work to be done. Don’t leave anything to the imagination.
Resolving Disputes and Modifications
For the resolution of any dispute that arises from this agreement, the parties agree to attempt first to resolve the matter between themselves in good faith. If the matter cannot be resolved, the parties agree to mediation as the next step. If the matter remains unresolved, then the parties agree to binding arbitration under the auspices of the American Arbitration Association. Subject to this dispute resolution provision and without hindrance to any other aspect of this agreement, either party may seek immediate equitable or injunctive relief in the event of a breach of this agreement. This agreement constitutes the entire understanding between the parties and supersedes all prior agreements of the parties concerning the subject matter hereof. This agreement may not be amended except in a writing signed by all the parties.
Practical Examples and Creating Solid Contracts
Contract disputes between homeowners and contractors are not uncommon. Homeowners often feel as if they have been cheated by contractors, while contractors often feel that homeowners have unfairly withheld money or have failed to hold up to their obligations. Below are some examples of agreements and practices in the real world that may help you as a homeowner or contractor create your own agreement.
A contractor we represent recently finished a home remodeling project for a couple who were completely satisfied with his efforts. In that transaction, the contractor and homeowners agreed upon an hourly rate plus a certain amount for expenses (mileage, etc.), with no more than 25% markup on any materials purchased. The agreement did not mention any percentage for profit. Both sides realized a significant benefit from this agreement; the homeowners were satisfied and the contractor earned a fair profit for his work. After all was said and done, the homeowners paid the contractor more than they expected to in order to take care of certain estimates of future work, purchasing materials for the homeowner at a lower rate, and providing him with a gift card to a restaurant.
The homeowner in the remodeling example could have alternatively contracted with the contractor for a fixed price for the entire project plus expenses. By doing so, the homeowner would have had a fixed price to reflect in his 2013 taxes. However, a fixed price would also mean that the contractor would charge a higher rate for that work . In this situation, both sides came out ahead by agreeing to an hourly and expenses rate with a 25% material markup.
Another construction company we know requires homeowners to pay one third of the project cost in a retainer, which is refundable if the homeowner is unhappy with the contractor’s work. If the project is successfully completed, the retainer will then be applied to the remainder of the project price. This can protect a contractor from losing money if the project is terminated (the contractor is not entitled to any compensation for the time spent if the project is terminated).
A best practice in crafting an agreement would be to define what would happen if the parties could not agree on the value of any extra work performed concerning unforeseen conditions, such as electrical work in a wall that was not visible at the time of the agreement. It would also be a best practice to define who would determine whether the homeowner’s complaint about the contractor’s work were valid. In the case of this contractor, the decision would likely fall to attorneys, the contractors’ peers, or the local BBB. By defining binding or non-binding arbitration, these parties can save themselves much trouble down the line.
Positive and negative experiences from 3rd parties are worth considering when you enter into your own contract or agreement. Contracting successfully and reaching mutually acceptable resolutions is beneficial to everyone.
