Contract Check-Up

Sidebars: Going Up: Should You Add a Price Escalation Clause?

A contract is never complete. For remodelers, who are used to projects with a beginning and end, that can be a difficult concept to accept, says Tom Cooper, who teaches a contracts course for NAHB.

"Because situations change, laws change and because of things we haven't thought about [yet], we continually revise these documents," says Cooper, a professor emeritus of building science at Alabama's Auburn University. "Document preparation is a process and not an event."

John Fiderio, owner and operator of Meriden, Conn.-based Fiderio & Sons, agrees. As his full-service remodeling business evolves and market conditions fluctuate, he responds accordingly.

"We've been in business since 1983, so it's something that we've added and modified as we've gone along based on things that have come up," he says. "As a matter of fact, we're in the process of doing a major rework on our contracts."

After recently attending a seminar on contracts, Fiderio decided to create multiple contracts that would be scope-of-work specific.

"We'll probably end up with three different contracts —one for all the specialties, which would be the siding, windows, decks and sunrooms, one for kitchens and baths, and probably one for additions," he explains.

At a minimum, remodelers should amend their contract as new laws are handed down and when language revisions become necessary. Paul Montelongo, an industry consultant and former remodeler from San Antonio, Texas, also advises an annual review of the contract to make sure the document is in top shape.

Where to begin?

Don't start by looking in the business form aisle at the office supply store.

"I saw a guy a number of years ago who pulled a contract off the shelf at a stationery store and spent most of his time making the logo pretty so the contract looked nice," says Van M. White, a Portland, Ore.-based attorney who practices construction law.

Unfortunately, it had some ugly language that came back to haunt the remodeler: For example, it said the contractor would build to the complete satisfaction of the property owner. That kind of talk can make for a mighty long punchlist and postpone closeout.

If you're using a boilerplate contract, these legal agreements may put you in an equally vulnerable position. So how do you ensure that your contract is rock solid?

First, hire an attorney — and probably not the same one that drew up your will. Whether the attorney will draft a new contract or review an existing document, this is not the time to hire just anyone with a legal degree. An attorney specializing in construction or real estate law, who is well versed in the industry, is better equipped to create a sound remodeling contract than a lawyer practicing general law.

It's also important to consult with a lawyer who is familiar with the state and local laws that govern a company's operating area, says Mike Weiss, CGR, CAPS, GMB, who teaches residential construction management seminars around the country. Where a remodeler does business will dictate some of the contract's provisions.

Professional associations also are good resources for applicable state and local laws. "If you're out there solo and you're not involved with an association, it's very easy for this stuff to slip through the cracks," Montelongo says.

Remodeler John Fiderio, left, works with two different attorneys: a Virginia construction contract specialist and Connecticut lawyer Joe Wiegan, who specializes in real estate, wills and estate planning.Photo by Dave Bradley PhotographyCover the basics

Any contract worth more than the paper it's written on must have the following elements:

• A written agreement. Include the parties of the contract and description of the property.
• The complete scope of the project. This should contain complete, dated and signed plans and clear specifications for the project. A design/build remodeler may want to address ownership of the design.
  The specifications should include a list of materials and products to be used. Fiderio & Sons includes information on contracts in the FAQ section of the company's Web site. To prospective clients, Fiderio recommends: "Your contractor should detail a list of all materials for the project in your contract. This includes size, color, weight, model, brand name, quantity and product."
• A site plan. The plan needs to include footprint modifications, setbacks, limits of disturbance, staging areas, utility locations, drainage areas, parking areas, location for job site trailer or portable washroom facilities, and site signage for things like permits, plans and inspections.
• Express limited warranty. In addition to what is being warranted, include the limits of coverage. If anything is reused during a remodel, a sink for example, it should be expressly excluded from any warranty obligations.
  Fiderio's Web site also suggests: "The name and address of the party who will honor the warranty (contractor, distributor or manufacturer) must be identified. Make sure the time period for which the warranty is offered is clearly specified."
• Bid price and terms of payment. Whether a company uses lump sum, fixed price or another method, make sure the amount and payment schedule are clearly outlined in the contract. For large jobs, White suggests periodic payments that aren't tied to project milestones to keep a project in the black. Final payment should be based on substantial completion.
• Change order clause. Construction contracts have to be designed for change. Customers change their minds. Specified materials may not be available. This clause allows the remodeler or homeowner to make changes without invalidating the contract.
• Hidden conditions provision. If crews run into a concealed or unknown situation (like mold, termites or wiring that's not up to code) during the progress of the job, the remodeler can decide how to best handle it and adjust the contract — and price — accordingly.
  "The beauty of that from the contractor's point is they don't have to eat the [cost of] unanticipated things that are encountered," says Cooper. "The beauty of that from the [homeowner's] point is the contractor doesn't put contingency money in there for things that he might encounter, and, if he doesn't encounter [anything], put that money in his pocket."
• Assumptions and contingencies. "There should be a provision in the contract that the homeowner will make electrical and water available for the construction. Usually we include a provision that there is going to have to be a Dumpster on sight [and] that there's going to be storage of materials on site," says construction attorney Gary Javore, who practices in San Antonio, Texas. "A lot of people don't have that expectation or don't think about that."
  Fiderio recommends detailing how household goods will be protected and what sort of daily and/or end-of-job cleanup will be provided.
• Sequential schedule of primary construction tasks. Time frames and dates are optional, but remodelers need to build in language that offers protection from delays that are beyond their control such as a holdup due to product selection.
• Written procedural list for close out. How do you define when a project is complete? Spell it out. "Some clients will drag you through a dozen punchlists and never allow the project to be finished," says Montelongo.
• Alternate dispute resolution. Though most remodelers would like to think a customer wouldn't sue them, disagreements happen. This clause spells out how alternate methods such arbitration and mediation must be attempted before jumping into a costly court battle.
• Right to rescission. Some states require a "cooling off" period during which the homeowner can legally cancel the agreement without risk or loss. This portion of the agreement is often required to be a separate part of the documents rather than being "buried" in the body of the agreement.

Lessons learned

In addition to the basic provisions, supplemental conditions should also be written into contracts.

"There are a lot of provisions in our contracts that come from the school of hard knocks," says Javore.

Chuck Breidenstein, a Madison Heights, Mich.-based arbitrator for the American Arbitrators Association and presenter for several state chapters of the Home Builders Association, knows firsthand that many remodelers learn the hard way about supplemental conditions.

• The "Fluffy" clause. In one of Breidenstein's examples, a remodeler was building a second-story addition for a customer. At the end of the first day, the existing roof had been removed and a new floor frame installed and sheathed. Unbeknownst to the contractor, the homeowner's pet cat had fallen asleep in the new floor frame and was effectively sealed in for the night. The cat was rescued the following day, but unfortunately experienced severe trauma that resulted in counseling at a pet psychiatric center — at the expense of the remodeler, of course. A "Fluffy" clause, which addressed the homeowner's responsibility to keep the work area clear of family pets and children, might have protected the remodeler in this case.
• Dispute resolution. Another remodeler, who had completed a major addition and renovation for a client, was notified that the home had developed a mold problem. The mold had rendered the property uninhabitable, according to the homeowner's attorney. The family, on the attorney's advice, vacated and boarded up the home, which exacerbated the problem. The remodeler was denied access to the property. Two years later, and several days into the court proceedings, the homeowner's attorney requested a settlement meeting before the defense began its rebuttal. The parties settled, but costs to the remodeler prior to settlement exceeded $100,000. In this case, an alternate dispute resolution clause might have saved the remodeler substantial money.
• Written performance guidelines. In another case, a homeowner sued a contractor for spalling concrete on a driveway and non-structural, arguably drying, cracks in a basement foundation. The suit sought replacement of the entire 16- by 40-foot driveway even though the spalling was limited to an 8- by12-foot area where the car sat, and compensation for the cost of the basement, even though the crack in the foundation was not structural and was not a path for active water movement. Initial findings were for the homeowner on both counts. A subsequent appeal reduced the total award to $3,000. However, had the contractor included written performance guidelines within a limited warranty clause, he might have prevailed.
• The non-transferable clause. Breidenstein encountered one situation where a remodeled home was sold to a new buyer during the warranty period. The new homeowner then tried to sue the remodeler on "quality issues," alleging breech of contract on the transferred warranty. The court did rule in favor of the remodeler, but a non-transferable clause added to the warranty might have prevented the suit in the first place.

Breidenstein also cited an ongoing case involving a builder/remodeler of upscale residential properties who was in the habit of taking deposits and initiating construction without completed written construction documents. In the contractor's words, this was "due to the fact these buyers made frequent changes that made specifying nearly impossible." In this case, the homeowner gave the contractor $500,000 and a directive to "get the foundations going" without a finalized written plan, specifications or agreement.

Three years after substantial completion and occupancy by the homeowner, the contractor is still working on punchlists and negotiating with the homeowner's attorneys to avoid court. The example proves that no matter how cumbersome it seems to document a detailed plan, operating without one can create a far more troubling situation.

Consumer education

A solid contract is just a starting point if a remodeler wants to avoid legal entanglements. Most disputes and subsequent lawsuits arise because clients don't have an understanding of what's going to happen during a project.

Although some remodelers may see a contract simply as a device used to drag people into court, the document can actually be used as a tool to ensure good customer experiences.

"You really are drafting the contract with an eye toward educating the consumer, so they don't have any nasty surprises at the backend. You're trying to set their expectations at the front end," Javore says.

In order to do that, a remodeler needs to be comfortable with his or her contract.

"It really needs to be tailored to you and done in such a way that you're not afraid to explain it to a client," Weiss says. "I have an awful lot of people who have what they feel is a really tough contract, but it's so tough that they feel really self-conscious when they have to explain it to somebody. If it looks too one-sided, it may be too one-sided and if it's too one-sided, a judge will throw it out. There's nothing wrong with a tough contract as long as it describes the work you're going to do and how it's going to be paid for and what the standard is."

 Going Up: Should You Add a Price Escalation Clause?

Escalation clauses are nothing new to the building industry. Though many remodelers can remember back to double-digit inflation in the 1970s, material prices have been fairly stable for quite a number of years. But with a record-breaking 2005 hurricane season, including devastating Hurricane Katrina, material prices are on the rise.

"Anybody in the business knows that shingle, plywood, OSB, framing lumber and gypsum board prices are going through the roof," Tom Cooper says.

Industry consultant Mike Weiss used a contract with an escalation clause during his tenure at the helm of a Carmel, Ind.-based remodeling company. He invoked the clause, which held the customer responsible for price increases over 2 percent, only a few times over the course of 20 years in business.

"It's more germane today because back then I would get a commitment on holding the price for lumber for a lot longer than you do now," Weiss says. "Now they give you a quote on lumber, and you say, "How long is my price good?" and they say, "What time is it?"

With spikes in gas prices as well as building material costs, attorney Van White says he sees legitimate reasons for including an escalation clause. One concerned contractor called him promptly after Hurricane Katrina to request that such a provision be added to his contract.