Business and Civil Litigation

CONSTRUCTION LAW

Facts & Questions

Although acting as your own contractor might be less costly, few people have the time to do that which is necessary to compile a team of reliable subcontractors. Of course, putting such a team together is only the beginning; in acting as your own contractor you will have to coordinate the timing of each subcontractor, make daily site visits to ensure that the project is on schedule and deal with the multitude of issues and problems that arise on a daily basis. If you do have such time, and expertise, then acting as your own contractor can be more cost-effective and will allow you to monitor progress and workmanship. If you do not have such time or do not possess a working knowledge of construction techniques and management then employing a contractor is imperative.

Selecting a contractor to build/remodel your families’ largest asset is the most important decision you will make in the home-building process. Select the right contractor and you will have greater peace of mind, more time to enjoy with your family, less stress, have greater success at staying on budget and a finished product that you can enjoy and feel good about. Select the wrong contractor and you will find yourself frustrated, spending time on issues you thought would be taken care of by the contractor, over budget and displeased with the quality of your new/remodeled home.

Prior to selecting a contractor, visit you local area home builders’ association. (www.tulsahba.com) Home builder associations are there to advocate for the home building industry while promoting ethical business practices and standards. Membership in home builder associations generally requires that contractors maintain adequate insurance coverage, have been in business for some minimum period of time, maintain professional and personal references and abide by a code of ethics and professional standards. Home builder associations will typically also be a resource in the event that you experience a problem with your contractor. Regardless of whether your prospective contractor is a member of a home builders’ association, you should always check their professional and personal references and, if possible, visit some of their other projects in progress.

Yes, you should have a written contract with your contractor. If the prospective contractor suggests that a contract is not necessary then you should continue your search for another contractor. The written contract should be exhaustive and should cover every aspect of the building process as well as all predictable contingencies, including a provision that all Change Orders must be in writing and signed by both owner and contractor. Prior to signing a contract with a contractor, consult an attorney experienced in construction litigation. It is imperative that you anticipate all problems that might develop and ensure that the contract adequately addresses those issues. Invariably issues arise and it is necessary to look to the terms of the contract to resolve the issue. Without such a contract, then it is likely that the issue either will not get resolved or will not be resolved to your satisfaction. Finally, once you have chosen your contractor and entered into the written contract, it is important that you and the contractor strictly adhere to the terms of that contract. Doing so will help eliminate many problems that can occur during the construction relationship.

There are several different types of arrangements that you can have with your contractor. Some of the more common arrangements are as follows:

  • The Traditional Construction Method. This method typically involves utilization of the services of both an architect/designer and a builder.
  • The Design/Build Concept. This method integrates the design and construction functions and places both with one entity, typically the contractor. Thus, full responsibility for all design and construction issues and problems lie with the contractor and, as a result, the construction process can be accelerated. However, unlike with the traditional construction method there is absent the checks and balances provided by involvement of both an architect and a contractor.
  • Turn-Key Method. This method is truly a “build-to-suit” arrangement where the contractor arranges for design, land acquisition, financing and fitting out the residence.

There are several different types of compensation arrangements that you can have with your contractor. Some of the more common arrangements are as follows:

  • Cost Plus. The contractor’s fee can be the cost of materials, labor and supplies plus a percentage of the cost to construct, cost plus a fixed fee, cost plus a fee with a guaranteed maximum or cost plus a fee with incentives. This can include remodeling projects where the contractor charges an hourly rate plus costs of materials.
  • Fixed Price. The contractor’s fee is a set sum, regardless of cost of materials, labor, and supplies and regardless of the length of the project.

Your new home may very well be your biggest asset. Consequently, it is wise to pay an architect to design your new home complete with specifications describing the required quantity and quality of the materials in the project. Depending on the size and scope of your remodeling project, it may be necessary to employ the services of an architect, draftsman or designer.

Prior to entering into a written contract with a contractor, you must protect yourself from the possibility that the workmanship, in whole or in part, is substandard. The most effective way to do this is to insist that the Construction Agreement allow you to withhold a percentage of the contractor’s fee until the work is complete and done to your satisfaction. This is called “retainage”. Withholding 10 to 15 percent retainage is likely adequate but will be frowned upon by the contractor. It is unlikely that your contractor’s insurance will provide coverage for poor workmanship. Retaining a percentage of the contractor’s fee will encourage the contractor to remedy all defects and poor workmanship.

Generally speaking, Builders’ Risk insurance protects against accidental loss or damage to property during construction of the project. This type of coverage is obtained to protect the contractor from uncompleted work being destroyed, thereby requiring the contractor to rebuild on the ruins at its own expense. Some examples of such accidental losses or damages would be those caused by fire and weather.

Although you might think that the CGL policy would provide coverage for poor workmanship or for repairing defective materials, it likely does not. Such problems are considered to be “commercial risks” that are not passed on to the insurance company. To secure coverage for such problems would require that your contractor obtain a performance bond. Performance bonds are very costly and as a result are not common in the industry.

The CGL policy is designed to protect the contractor and you from tort liabilities that may arise during or after completion of the work. Such tort liabilities would be those that are not foreseen by the contractor’s work but flow directly or immediately as a result of that work. An example of such covered damages might be if a ceiling is improperly installed, causing it to collapse and injure someone. The injury to the person would be covered but not the repair of the ceiling itself. This underscores the importance of selecting a contractor that is established, financially sound and reputable and insisting on retaining a percentage of the contractor’s fee until the project is completed correctly.