Key Takeaways

  • A home construction contract protects both the homeowner and the contractor by clearly defining responsibilities, payment terms, timelines, and remedies.
  • Important clauses include payment schedules, scope of work, dispute resolution, termination provisions, warranty terms, and mechanics lien releases.
  • Contracts should address change orders, define "substantial completion," and may include incentives or penalties (like liquidated damages).
  • Arbitration is often used for dispute resolution and is typically faster and less formal than litigation.
  • Homeowners should avoid waiving implied warranties and should scrutinize any required deposits to avoid potential fraud.

Residential construction contracts are used when a homeowner hires a contractor to work on their home so that both parties will be legally protected. 

Introduction to Residential Construction Contracts

Residential construction contracts provide invaluable legal protections to both contractors and homeowners.

Several issues will be covered by your residential construction contract, including:

  • The services your contractor will provide.
  • The compensation your contractor will receive.
  • The schedule of your project, including length of construction.

Having a construction contract in place ensures that constructions will be completed in the way the homeowner wishes and that the contractor will be fairly compensated. Construction contracts are available in several forms, but most professionals prefer a certain contract type. There are several variations between types of contracts, and you can also write a customized contract that fits the exact needs of your project.

Before either party signs a construction contract, they should review it fully to make sure that the terms are acceptable. Homeowners also have the right to negotiate the terms of a contract before signing. A residential construction contract can also help to prevent disagreement between homeowners and contractors, which is crucial in having a project completed on time. Generally, when you meet with your contractor, they will present you with a residential construction contract that's ready to be signed.

You could also have an attorney write a contract or draft one yourself. Construction contracts can either be very simple, covering only basic terms, or extremely complicated. To make sure your rights as a homeowner are protected, you should insist on a contract that has simple, understandable language and covers all necessary terms. 

Lump Sum or Fixed Price Contract Type

One of the most common types of construction contract is a lump sum contract, which is also known as a fixed price contract. With this type of contract, construction activities will have a fixed price that you will need to pay. These contracts will frequently include incentives for the contractor if they complete the project ahead of schedule, but may have penalties if the project isn't completed in the timeframe outlined by the contract.

Lump sum contracts make for a good choice when the scope of your project is clearly defined, including the constructions schedule, and both parties understand and agree to these terms. You would commonly use a lump sum contract when you want to avoid excess charges and shift risk to the contractor. Getting back money for uncompleted work can be difficult with this type of contract, which is something that you need to consider. 

Cost Plus Contracts

Cost Plus Contracts are another type of construction contract. This contract differs from lump sum contracts in that they include fees for coordinating and managing your project in addition to construction costs. Usually, the fee for coordination and management will be calculated based on the building cost percentage. These contracts will typically include information related to overhead costs and contractor profits. In the contract, both indirect and direct costs should be clearly defined.

Variations of the Cost Plus contract include:

  • Cost Plus Fixed Fee
  • Cost Plus Fixed Percentage
  • Cost Plus with Guaranteed Maximum Price and Bonus Contract
  • Cost Plus with Guaranteed Maximum Price Contract

When the project scope is not defined and the homeowner wants to put restrictions on what the contractor can charge, a cost plus contract will be used. The incentives frequently used in these contracts are a good way to limit excessive charges while protecting the interests of the homeowner. If you choose a cost plus contract, you should be prepared to more fully supervise your project. It's also important to remember your contractor will be less at risk with this type of construction contract. The cost plus contract is an extremely popular contract option and has increasingly grown in popularity over the last 12 years.

When you're preparing to hire a contractor for your construction project, you should consider the different types of contracts you can choose and how each individual contract can influence the length of your project. Typically, you will not actually meet your contractor until the bidding process has come to an end. However, if you choose a cost plus contract, your contractor will come onto your project in the very early stages, usually during the design process. No matter your contractor's skill level, you should expect a percentage of 15 percent.

Insurance and Licensing Requirements

Verify that your contractor holds valid licenses and sufficient insurance, including general liability and workers' compensation coverage. These documents should be provided before any work begins. Licensing ensures your contractor meets state requirements, and insurance protects against financial loss from accidents or property damage during the build.

Deposits and Payment Caution

Be cautious about large upfront deposits. While an initial payment is customary, excessive deposits can expose homeowners to financial risk if a contractor abandons the project. A safer approach is to align payments with completed milestones. Avoid paying in full before the job is finished and verified. Contractors should bill only after work commences and progresses satisfactorily.

Timeline, Delays, and Liquidated Damages

The contract should state when work begins, the anticipated schedule, and the final completion date. It’s also helpful to address allowable delays due to weather, strikes, inspections, or unforeseen events. Homeowners may want to include a liquidated damages clause, which imposes a daily fee on the contractor for each day beyond the agreed completion date. This incentivizes timely performance and offsets costs such as alternative housing or storage.

Change Orders and Scope Adjustments

Changes to the scope of work are common during home construction. Whether due to owner preferences, site conditions, or permitting requirements, any adjustments should be documented in a written and signed change order. Verbal changes expose both parties to confusion, cost overruns, and liability. Including a strict requirement for signed change orders helps keep the project aligned with expectations and budget.

Contractor Default and Termination Clauses

A termination clause should spell out what constitutes a breach of contract and outline steps the homeowner can take if the contractor defaults. This might include allowing the contractor time to "cure" the issue or giving the homeowner the right to suspend work or hire a replacement. These provisions are vital to ensure the project stays on track even if problems occur.

Dispute Resolution and Legal Remedies

Construction contracts frequently include a clause that mandates arbitration over litigation. This means disputes will be settled by an industry expert rather than a judge. Arbitration can be faster and less expensive, but it limits appeal rights. Some contracts also include attorney’s fees provisions, which determine whether the winning party in a dispute can recover legal costs. Homeowners should understand the implications of agreeing to arbitration and consider how disputes will be managed if they arise.

Warranty and Quality Standards

A home construction contract often includes an express warranty outlining what defects the contractor will remedy, how long the warranty lasts, and homeowner maintenance responsibilities. Homeowners should avoid agreeing to contract terms that waive implied warranties, such as the implied warranty of workmanlike construction or fitness for a particular purpose, unless clearly stated and acknowledged in writing. These implied warranties provide valuable recourse if defects emerge later.

Payment Terms and Mechanic's Liens

Every home construction contract should clearly define the payment structure. Typically, the contract will require a down payment before work begins, followed by progress payments as different stages are completed. These installments ensure the contractor has steady cash flow, but they should be tied to specific milestones or inspections.

Additionally, contractors should supply signed mechanic's lien releases from subcontractors to confirm they've been paid. Without these, a homeowner may face a lien against the property even if they’ve paid the general contractor. In many states, final payment is contingent upon "substantial completion," which should be clearly defined—preferably limiting any post-completion work to minor items only.

Frequently Asked Questions

  1. What should be included in a home construction contract?
    A home construction contract should include the scope of work, payment terms, project timeline, dispute resolution, warranties, and provisions for changes, delays, and termination.
  2. How is payment usually structured in these contracts?
    Payments are typically made in installments based on project milestones. A small deposit may be required, followed by progress payments after each phase is completed.
  3. Can I change the contract after signing it?
    Yes, but changes should be documented through written change orders signed by both parties to prevent disputes and unexpected costs.
  4. What if the contractor doesn’t finish on time?
    You can include a liquidated damages clause in the contract to impose penalties for delays, unless the delay is due to causes outside the contractor’s control.
  5. Are warranties required in home construction contracts?
    Warranties are not always required, but many contracts include express warranties. Avoid waiving implied warranties unless you fully understand the implications.

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