AllGen Home Improvement Blog 

Introduction

Embarking on a home improvement project in Pensacola or Baldwin County is an exciting endeavor, but it's crucial to lay a solid foundation before any work begins. A well-drafted construction contract ensures clarity, protects all parties involved, and sets the stage for a successful project. This guide will walk you through the key components of a construction contract and provide tips to ensure your home improvement project runs smoothly.

What is a Construction Contract?

A construction contract is a legally binding agreement between a homeowner and a contractor outlining the terms and conditions of a construction project. It specifies the scope of work, timelines, costs, payment schedules, and other critical details, ensuring both parties are on the same page.

Key Components of a Construction Contract

1. Scope of Work

   • Detailed Description: Clearly define the work to be done, including materials, labor, and any specific requirements or standards.  

A poorly worded scope would look like this: "Install exterior doors".

A good example would be something like "Provide labor and materials to remove and replace two 6'8" fiberglass exterior doors in accordance with the manufacturers specifications and building codes.  The scope includes removal and replacement of any existing door casing; painting, and debris removal.   

1. • Exclusions: Specify what is not included in the project to avoid misunderstandings.

2. Costs and Payment Terms

• Cost: The total amount you have agreed to pay the contractor.

• Payment Schedule: Specify when payments are due (e.g., upfront deposit, milestone payments, final payment).

• Change Orders: Explain how changes to the project scope will be handled, including cost adjustments.  Changes are by far the number one driver in cost overruns in construction contracts.  More on that later.  

3. Project Timeline

• Start and Completion Dates: Include the expected start and finish dates.

• Milestones: Break the project into phases with milestone dates to track progress.

• Delays and Extensions: Outline procedures for handling delays due to weather, supply issues, or other unforeseen circumstances.

Contractors will not put themselves into a tight timeline.  So you can expect this section to have numerous clauses which grant the contractor unpenalized time to complete the project.  This is a normal thing and in no way unethical or unscrupulous.  Especially for projects that will take 6 or so months, costing hundreds of thousands of dollars with dozens different subcontractors and suppliers involved.  

4. Warranties and Guarantees

• Workmanship Warranty: Describe the warranty on the contractor's work, including the duration and what is covered.  AllGen Builders contracts explicitly state the work will be in accordance with the National Association of Home Builder's Performance Guidelines. 

• Manufacturer's Warranties: Include information on warranties for materials and products used.

5. Dispute Resolution and termination of the contract

• Mediation and Arbitration: Outline steps for resolving disputes, such as mediation or arbitration, before resorting to litigation.

• Conditions for Termination: Define conditions under which either party can terminate the contract, such as non-payment or failure to perform.  I

• Notice Requirements: Include requirements for giving notice of termination and any associated penalties or fees.

Types of construction contracts: 

The two most common types of contracts in residential construction are cost plus and fixed price.  

Fixed price: This type of contract is simple.  A lump sum dollar amount will be paid (assuming no change orders) for the execution of the scope of work.  In a balance of risk, the contractor assumes the most risk here.  If he gets his estimate wrong for how much it will cost him, then he is the one that eats that cost. Not the home owner.  You can expect higher prices for this type of contract because of that risk to the contractor.  

Cost-plus: This type of contract pays the contractor a percentage of the total costs of the project or a fixed fee on top of the costs.  The owner is assuming more risk for this type of contract because the contractor has little motivation to reduce costs on the project outside of his own moral compass.  This type of contract requires a good measure of trust by the homeowner.  

Now don't mistake my meaning when I talk about more or less risk.  That doesn't mean fixed price contracts are risk free for the home owner.  

To illustrate, let's say you want a new house built and get an estimate from a couple contractors.   One contractor comes back in a matter of days with a fixed price contract that is well within your budget.  You feel good about it because they built a deck for your neighbor at a great price in the past and he was $20,000 less than his competitor.  You sign the contract, pay your deposit and get under way.  

Unbeknownst to you, the contractor underbid the project because he really needed the work.  The job is progressing slowly.  The bank won't provide any more construction loan draws because no more work has progressed.  He can't finish the job for what he originally agreed to. He starts cutting corners.  Maybe ordering lower quality materials because it wasn't specified in the contract.  Hiring the cheapest subcontractors.  He runs out of money.  Now you either have to fire him or pay him more money so he can finish.  Or worse, you end up in arbitration or litigation.  Both will cost you time, money, and most likely quality of the work.  

Now lets say you got another estimate from a different contractor that told you he would only do it under a cost plus arrangement.  This contractor had some good online reviews and experience building homes.  His estimate of costs was competitive but not the cheapest. You don't like the idea of a contractor getting paid more if your costs go up but you do it anyway.  The project progresses without a hitch.  You see the higher quality materials being installed.  The contractor has cut no corners because there was no incentive to do so.  

So, while fixed price contracts are LOWER risk, there are definite benefits to the owner for the cost plus contracts.  

Tips for Homeowners

1. Get Everything in Writing: Verbal agreements can lead to misunderstandings. Ensure all aspects of the project are documented in the contract.  

2. Read Carefully: Take your time to read and understand the contract. Don’t hesitate to ask questions or seek legal advice if something is unclear.

3. Check Contractor Credentials: Verify the contractor’s license, insurance, and references before signing the contract.

4. Stay Involved: Regularly communicate with your contractor and monitor the progress of the project to ensure it stays on track.  A good contractor will provide regular updates on the progress of your home. 

5. Keep Records: Maintain copies of all contracts, receipts, and correspondence related to the project.

Conclusion

A well-drafted construction contract is essential for the success of any home improvement project. It provides clarity, protects both the homeowner and contractor, and helps ensure the project is completed as planned. By understanding the key components and following the tips provided, homeowners can confidently embark on their renovation journey, knowing they have a solid agreement in place.