Drafting Residential Construction Agreements
By Jeff Alden

Like all contracts, the residential construction contract1 must define what it is each party -- for our purposes the contractor and the owner -- expects to get out of the transaction. In the usual case, the owner expects to get the home he wants (or at least the one he can afford) at a fixed price (or at least a predictable one) well within his lifetime. The contractor expects to be paid for his time and skill according to a schedule that won't bankrupt him, and hopes to avoid liability for the things he can't control. If you keep these simple things in mind -- the owner's wish to get the house he wants, and the contractor's need to be paid on time and avoid undeserved liability -- you're well on your way to creating a workable residential construction contract.

What follows are several categories that, at the very minimum, should be addressed when drafting such an agreement. Caveat: there's more than one way to skin a cat, and there certainly can be different approaches to writing contracts. But the areas outlined below should be considered when drafting any residential construction agreement.

Scope of the Work. This is the introductory section of the contract and will set the tone. A sometimes overlooked reason for having a contract is simply to minimize the possibility of disputes later. The goal in drafting should be to create a procedural blueprint, if you will, for exactly what is to be accomplished, when, and for how much. More than once I've had clients tell me the real value of their contract is simply that it puts everyone on the same page, something that is particularly important when it comes time to collect periodic payments for the work. When a person contracts with you to build her a house, that's what she wants: a house. But it takes more than a hammer. At the very least, it takes building permits, labor, equipment, materials, purchasing and transportation, supervision, coordination, communication, shop drawings, storage, and skill. To the extent applicable, the initial section of the contract, entitled "Scope of the Work," should say what the contractor will provide -- permits, labor, equipment, materials, etc.("The Work")2 -- and to what end: the construction of a home for the owner at a specific address.

Drawings and Specifications. Because the devil is in the details, the next section of the contract should provide that the home will be constructed according to the drawings and specifications which are attached as Exhibit A to the contract, with the proviso that, in the event of dispute, the specifications shall control the drawings and the provisions of the contract control both. Recognizing that any simple summary of the builder's duties and obligations is doomed to failure, it is best to simply incorporate all of the details of the project. Then make sure that the drawings and spec sheets are initialed by both parties.

Boundaries. In the interest of avoiding possible liability, it's not a bad idea to include a paragraph requiring the owner to supply the contractor with a legal description of the property and, if requested, a survey and boundary stakes by a licensed land surveyor. Again, a good contract is aimed at avoiding trouble down the line, and what greater trouble could there be than that chestnut of first year property class -- the home constructed on someone else's land.

Time for Completion of the Work. Because the project also has a time dimension, it is a very good idea to be clear about that too. This requires a start point and an end point, subject to permissible delays due to untimely payment or acts beyond the contractor's control, eventualities that should be spelled out in the contract. A provision requiring the owner to have the job site ready for construction and to give written notice of that fact to the contractor should be included, with the contractor starting work a specified number of days after receiving the notice. I have had clients object to the idea of including in the contract a statement that they will complete the project within a certain number of calendar days, but in the interest of predictability and reduction of surprises and disputes, I believe it is a very good practice to do so. However, having said that, the contract should contain express provisions excusing delay in completion caused by acts of God, the owner, inclement weather, labor trouble, acts of public agencies, inspectors or utilities, extra work, delays in payment, or other unforeseen contingencies beyond the reasonable control of the contractor.

Payment. The primary purpose of this section is to insure a steady stream of money so that the contractor gets paid and the house gets built. The two concepts are highly interrelated. With this in mind, the payment section should state up-front what the contract price of the work is. Subsequent sections will set forth events that might cause a deviation in the contract price, but to discuss payment you must be clear about what is going to be paid.3 Then, and this is the whole ball game to the contractor, the section on payment should set forth when payment is to be made and in what amounts. The contractor will have a great deal of time-consuming work to do -- securing plans and drawings, obtaining bids, etc. -- before ground is broken. The contract should require an initial payment upon signing so that the contractor has less chance of falling behind at the early stages. After that, the contractor should submit to the owner on or before the last day of the month an application for payment showing the percentage of completion of the work according to a schedule of values that have been agreed to beforehand, along with signed mechanic's lien releases or waivers covering the previous month's materials purchased and stored. The point is for the contractor to be compensated not only for what he's done, but also to cover his outlay for materials purchased but not yet used. The agreement should provide that the owner will make payment of the value of the completed work and the materials purchased and stored during the previous month by a specific date every month, with the contractor having the right to stop work and keep the job idle if payments aren't made when due.

Allowances and Change Orders. If the contract price includes allowances, which can best be described as a preset range within which the price of certain fixtures or subcontracted work may fall, the contract should provide that the price be adjusted up or down if the cost of fixtures or work covered by the allowances is greater or less than the allowed amount. Likewise, should extra work or modifications be required either by the owner, lender, a public agency, or on account of concealed conditions, the cost variance should be added to or deducted from the contract price accordingly. The contract should also set forth in advance the formula for the cost of extra work. One rule of thumb is the contractor's costs plus 15 per cent for overhead and 7.5 percent for profit, but of course this is a subject to be discussed with the contractor before drafting. No extra work should be undertaken without a written work order signed by the owner and the contract should so stipulate. However, recognizing the oftentimes casual way changes can unfold, it is wise to include a provision for payment regardless of whether the extra work order is reduced to writing.

Substantial Completion. This section is an attempt to prevent the "nickel and diming" phenomenon that sometimes occurs when the end is in sight. It's a good idea to spell out when done is done. The contract should say something like: The final payment will be due ten days after substantial completion of the project, and go on to explain exactly what constitutes substantial completion. Case law defines substantial completion as that stage when the work is sufficiently complete so that the owner can occupy or use the home for its intended purpose.4 The contract should state that if repair work of a minor nature remains to be accomplished, the contractor will take care of it expeditiously but the owner is not entitled to withhold payment pending completion. On the other hand, if major items remain to be done after substantial completion, the cost of which aggregate more than one per cent of the contract price, the owner may withhold an amount sufficient to cover the remaining major work.

Occupancy. The flip side of when the project is done is when the owner can occupy it, which of course is not until it's substantially completed. A provision granting the contractor the right to use necessary force to deny occupancy of the home until he's been paid may be a good idea. That being said, however, the contractor who would resort to force based on such a paragraph should take a deep breath and lay down his hammer until he has secured a court order.

Notices. A written contract is your opportunity to make sure that all important notices are given to the owner, either to preserve the contractor's rights or limit his liability.

• Mechanic's Lien Notice. First and foremost, of course, is the mechanic's lien notice. Pursuant to statute, every person who enters into a contract with the owner for improvement of real property and who has or will contract with others to provide labor, skill, or materials to the improvement shall include in any written contract with the owner the statutory mechanic's lien notice.5 A person who fails to provide the notice, doesn't get the lien.6 It's that simple. All the legalese in the world may be for naught if the contract doesn't include a mechanic's lien notice. Any lawyer will tell you that the secret to getting paid is leverage, otherwise known as security. There are few creatures in the law with the leverage of the mechanic's lien entitling the lienholder to sell the owner's real property in the event of nonpayment.
  
• Mold Notice. According to Leviticus:

  And he shall look at the plague,7 and indeed if the plague is on the walls of the house with ingrained streaks, greenish or reddish, which appear to be deep in the wall and he shall cause the house to be scraped inside, all around, and the dust that they scrape off they shall pour out in an unclean place outside the city ... and if the plague comes back and breaks out in the house, after he has taken away the stones, after he has scraped the house and after it is plastered ... he shall break down the house, its stones, its timber and all the plaster of the house and he shall carry them outside the city to an unclean place.8

Though mold is an old problem, it has recently become a legal growth industry spawning whole new categories of expert witnesses, insurance policy exclusions, and inventive legal theories . Insurers paid out more than $1.2 billion in mold-related claims in 2001. Insurance for residential builders in Minnesota is becoming more and more difficult to obtain and what insurance is available is increasingly expensive.9 So, what to do? While by no means a panacea, it is a good idea to include a provision in the construction contract labeled "Notice and Limitation of Liability Regarding Mold," and place it in the section on important notices, right after the one for mechanic's liens. The notice should explain in plain English what mold is, how to prevent it, and inform the owner that the contractor makes no warranties regarding mold, either express or implied, and will not be liable for mold-related damages.

• Formaldehyde Notice. No builder shall sell or lease to the initial occupant a housing unit containing urea formaldehyde, other than a unit of manufactured housing, unless either the builder or the manufacturer has made the statutory written disclosure regarding the dangers of that chemical.10

Conclusion. Building a house, for both the contractor and the owner, can be a complicated and trying business. One way to minimize the difficulties that may ensue is to have a contract that provides a blue print for the process, clearly reflecting both the owner's desire to get the house he wants at a predictable price, and the contractor's need to be paid on time while avoiding liability for things beyond his control.

Notes
1. There are at least two kinds of contracts in the residential construction industry: the straight builder's contract; and what has become known as the design-build agreement. In the first, the general contractor contracts to build a home for the client. In the second, the contractor not only builds the home, he designs it -- either by using in-house staff or hiring an architect. This article will explore the basics of drafting the straight residential construction contract.

2. Subsequent sections of the contract should spell out in more detail what exactly the contractor is providing in these categories.

3. Alternatively, the contract might have separate sections for price and payment of the price.

4. See MSA §541.051, Subdivision 1(a), Wittmer vs. Reugemer, 419 N.W.2d 493 (Minn. 1988).

5. MSA §514.011, Subdivision 1.

6. Id.

7. The plague is defined in the New King James version of the Bible as "decomposition by mildew, mold, dry rot, etc." [with thanks to Timothy J. Hassett of Felhaber, Larson, Fenlon & Vogt, P.A. for his October, 2002 CLE presentation materials: "Why Mold, Why Now" from which the following biblical and non-biblical information on mold was taken].

8. Leviticus 14:37, 41, 43, 45.

9. Hassett, "Why Mold, Why Now," supra, note 7.

10. MSA §325F.18.

JEFF ALDEN is a sole practitioner in Minneapolis whose practice focuses on problems encountered by small businesses. He received his J.D. from Seattle University School of Law and he is a graduate of Princeton University.