Residential Construction Contracts

Construction is moving again.  From mega-projects like the SR99 Tunnel and the SR520 bridge to new housing projects down to the modest bathroom remodel, these improvements bring great benefits to our communities.

They also carry endless possibilities for disputes through misunderstandings, mistakes or even overt misconduct.  Owners and contractors in large projects work closely with their attorneys to carefully craft and follow their agreements.  But for the small contractor and homeowner, legal fees may feel like an unnecessary and avoidable expense.  Our experience is people spend much less in legal fees when they involve a lawyer before problems arise, but if they don’t, a few basic principles should help home owners and their contractors reduce their chances of trouble.

1.  Get it in writing before the work starts!  Far too often, agreements on residential projects are based on oral discussions and an exchange of emails.  At some point, the contractor may offer a document titled “Estimate” or “Bid” that states the basic financial expectations and has a page or two of “conditions” attached to it.  If the conditions are well drafted, they may be a good start, but too often they include terms that neither the owner nor the contractor intend or fully understand.

Parties who make sure their contract matches their actual expectations are far more likely to work through the challenges that inevitably arise.  And if the problems are so serious that they end up in court, the parties’ legal fees are inevitably much smaller if their contract is clear and fair.

2.  Make all changes in writing.  Projects are rarely completed exactly as the parties expected when the work began.  Changes happen for many reasons including aesthetic preference, cost considerations, unanticipated structural challenges and incomplete plans.  Whatever the cause, owners and contractors should always confirm all changes in writing before the work is done.  The simple discipline of putting the change in writing will significantly reduce arguments at billing time. No one wants to be in that discussion where the owner says “I know I said we wanted to make the windows a little bigger, but had no idea that would cost $7000.”

3.  Make sure the Contractor and Subs are Licensed.  Contractor registration / licensing rules require anyone providing construction services to be licensed.  And it’s easy to confirm their status by checking with the Washington State Department of Labor & Industries. To have a valid license, a contractor must have insurance and an active bond.  Washington law rewards licensing by giving licensed contractors powerful lien rights.  It punishes contractors who work without a license by prohibiting them from filing a lien or suing to enforce their contract and exposing them to criminal charges. An unlicensed contractor almost never has a bond. A contractor who allows an unlicensed subcontractor to work on the project faces significant risks.

4.  Bill and Pay according to the Contract.  Payment for smaller and midsized construction projects is typically based on either a “fixed price” or “cost plus fee” structure. Cost plus fee may be known as “time and materials” or “T&M.”

As the terms suggest, a fixed price contract is an agreement to pay a specific sum for a defined scope of work.  The contractor carries the risk and opportunity for profit based on efficiencies.  The owner receives the benefit of a certain budget. Progress payments should be based on the amount of work completed, regardless of how much it cost the contractor.

On the other hand, in a cost plus deal, the owner pays the contractor for its actual costs plus a fee.  The fee may be a fixed amount or a percentage of the costs.  These contracts usually have a budget or estimate, but billing is based on the contractor’s actual costs for labor, materials and equipment.  “Costs” and “fees” are defined many different ways.  On one extreme, the contractor accounts for every dollar spent, including for employee benefits, office supplies, fuel, B&O tax and a portion of its insurance premiums.  A fee for profit is added.  On the other end of the spectrum, the contractor only accounts for its employee’s hours and invoices from its subcontractors and suppliers.  All overhead is accounted for within the fee.

Whatever the method the parties choose, they should understand it and follow it carefully.

Good legal counsel at the beginning of a construction project can efficiently help owners and contractors clarify their expectations and establish procedures to help the project run smoothly, saving money and stress in the long run.  Contact Kyle Netterfield or Lana Floyd with questions on your project.