Issues to Consider Before Signing a Construction Contract

With the recent issues involving high profile builder/contractor financial challenges, and with the proliferation of buyers who are considering new home construction, we have received a number of inquiries lately about adequately negotiating construction contracts to best protect anyone who wants to build a new home. While there is no substitute for engaging a qualified attorney to address the nuances associated with all construction contract negotiations, some general issues to consider prior to entering a contract for new construction are:

  1. Construction Timeframes.  Does the contract provide for a definitive commencement date and completion schedule, and are there penalties if the builder misses those marks?
  2. Change Orders. Is the scope of the project very clear, and what is the written process (and price) for requested changes?
  3. Deposits. Does the contract require a substantial amount of upfront money be paid to the builder?
  4. Draw Schedule. Does the contract provide for a sufficient number of draws so that the money paid to the contractor is  proportional to the work performed to date?
  5. Inspections.  Does the contract permit inspections as a condition to each draw, and, more importantly, as a condition to final payment?
  6. Punch List.  Does the contract address the manner in which punch list items are to be completed and by when? Does the contract require final payment prior to the completion of punch list items?
  7. Lien Waivers.  Does the contract require lien waivers as a condition to each draw, and more importantly, as a condition to final payment?
  8. Holdbacks/Final Payment.  Does the contract provide for an adequate holdback from each draw, as well as a reasonably sufficient final payment, to better insure that there will be sufficient funds to complete the project if the builder fails to perform?

In general, do not assume that the manner in which a builder’s form contract addresses these (and other) issues is fair to both sides. Often times the above issues are not adequately addressed in a manner that best protects the buyer’s interests, and there is very little any lawyer can do after the fact. Negotiating construction contracts can be extremely complex, and should not be done without consulting with anattorney.

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