Selecting a Contractor Part III Negotiating a Contract

By Jerome Graber,
April 7, 2019
Home | Selecting a Contractor Part III Negotiating a Contract

Negotiating a contract that protects your interests

Welcome to part three in our series on selecting a contractor for your home improvement project. Our first article in the series was on soliciting bids while the second article was on evaluating bids once you’ve received them. If you haven’t read those articles yet, I recommend you start there to get a full grasp.

But for those of you who have read those articles, welcome back! Let’s dive right in.

Key components every contract should include

Construction contracts can vary greatly, but there are a few things that should be included in every one:

  1. A starting schedule for the work.
  2. Exact payment terms.
  3. A specific description of all the work to be performed and the materials to be used.
  4. Contract dispute resolution methods.

Starting schedule

A Starting Schedule: Your contract should always give a starting date for the work. If the work to be performed is primarily exterior work, it is ok for the contract to have a date range of when it will begin to accommodate weather related delays. But you should know when you sign the agreement approximately when you can expect the work to actually commence on your project. In addition, your contract should spell out a projected work timeline and approximate completion date.

The purpose of this is to ensure that your contractor treats your project as a priority when he is working on it. As a homeowner who wants to have a good working relationship with your contractor, you want to have a little bit of grace, as unexpected situations frequently come up in the trades. But you definitely need to have some idea what to expect when you sign so that you are able to hold your contractor accountable if it seems like your project is not getting the attention you were promised when the project starts.

Having agreed upon target dates to work with is just good business practice, and you should insist that your contractor give them to you.

Exact payment terms

Exact payment terms. Your contractor is probably going to want at least a small down payment when you sign the agreement, and depending on the size of the project may want draws, or partial payments, throughout the project. This is industry standard practice in the residential contracting business. However, the exact draw schedule needs to be spelled out in the contract.

Your down payment should not exceed 10% of the total contract amount. If your contractor is asking more than this, feel free to renegotiate. Ten percent is plenty down payment to demonstrate your commitment to the project and cover his ancillary up front costs. Any more than that reduces your contractor’s incentive to actually perform the work, as you will have paid him too large a chunk of his expected profit up front.

On most projects, you will be asked to pay a material delivery draw. Again, the exact amount of this deposit should be specified in the contract. Never pay a material delivery draw directly to your contractor until the materials are on site. If your contractor needs you to pay up front for the materials before delivery, insist on paying directly to the actual material supplier off of a purchase order. Unless your contractor intended to run off with your money, he or she should have no problem at all with you paying for the materials directly to the supplier and deducting it off of your total contract.

Finally, and most importantly, your contract draw schedule should always leave a minimum of 10% of the entire contract to be paid upon final completion after the building inspector has signed off on the job and any quality control concerns have been addressed. Human nature being what it is, you want to make sure your contractor has incentive to take care of the final finish up on your project.

Specific description of all the work to be performed

A specific description of the work to be performed and the materials to be used. The more specific the better!

On simple jobs with only one or two elements, this is easily accomplished. Which brand of product of a specific color, which areas to be effected, and a few other details will suffice. But on a larger, more complex projects, your specification sheet will be much longer. There is no such thing as too much detail for this part of your contract! Make sure you are as comfortable as you can be that absolutely everything you are expecting to be included in your project is spelled out in writing. The differing details between multiple bids that we talked about earlier will come in handy here. Go ahead and review the other bids you got to help you think of what all should be included.

One note: Sometimes building contracts get signed before you the customer have made final selections of things like light fixtures, flooring, and the like. If that is the case in your contract, at least make sure the exact amount of money allotted in the contract price to purchase these various items is spelled out in advance. But whenever possible, it is best to have selected all your products at the time you sign your agreement to avoid one possible source of unexpected cost over-runs.

Contract dispute resolution method

Contract dispute resolution methods. What happens if, God forbid, worst comes to worst and you end up in a situation where you have a dispute with your contractor over the work? Obviously the first and best solution is to just talk it out and come to a mutual agreement. But what if you can’t?

Your building contract should always specify the exact dispute resolution method. Will any disputes be heard by an arbitrator, or will they be adjudicated in the court system? If so, which jurisdiction? If you have to sue your contractor or he sues you, can you recover your attorney’s fees and other court costs if you win the dispute? These are important questions that should be specified in your building agreement.

Any reputable contractor who wishes to stay in business long term will only resort to arbitration or court to settle a disagreement with a client as the very last resort, and this kind of thing happens less often than is commonly imagined. But it is still important that you know going in exactly what the worst case scenario will be.

Ok, that covers all that! Next time, we will look at the final installment in this series, how to work with your contractor during the actual building process to ensure the best result possible.

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