A building project requires the cooperation of a number of parties. Typically, the main contractor oversees the project, while subcontractors handle more specialized tasks such as electrical wiring. Because of the complexity of such projects, building contracts need to be detailed and comprehensive. An effective building contract will include building specifications, labor specifications, payment terms, a payment schedule and arrangements for change orders. The contract must be rigid enough to hold the contractor to strict quality standards, yet flexible enough to allow for changes in specifications when necessary.
Instructions
1. Look over a sample construction contract. This will familiarize you with some issues that you may not have thought of. Do not copy the contract word for word, however, because every transaction is different.
2. Negotiate building specifications in great detail. You will need to decide what types and brands of materials must be used, which quality standards apply and exactly what services are to be rendered. Use numbers and diagrams whenever possible, and refer to objective standards such as industry and municipal building codes.
3. Decide on labor specifications. Labor specifications specify in detail the starting and ending dates of the project, hiring practices for subcontractors, transportation of laborers to and from the site and waste disposal procedures. Since you are not dealing directly with the subcontractors, it is critical that you control the main contractor's selection and management of subcontractors. If you are familiar with local subcontractors, agree in advance which subcontractors will be contacted first and which ones will not be contacted.
4. Determine the payment terms. Two types of payment terms are commonly used--the fixed-price method and the cost-plus method. The fixed-price method sets the total price for the job, and the contractor's profits equal the fixed price minus expenses. The cost-plus method pays the contractor for his expenses and adds a guaranteed profit. The fixed-price method avoids uncertainty as to the total price and leaves the contractor with a strong incentive to avoid cost overruns and construction delays.
5. Work out a payment schedule. The contractor will require a certain percentage of the total price--10 percent, for example--to cover start-up costs. After that, you should offer portions of the total price as phases of the project are completed (known as "milestones"). Withhold a significant amount--20 or 25 percent--until several weeks after the completion date, so that you can inspect the property to confirm that the job has been completed properly.
6. Insist on a provision that allows you to issue change orders during construction. It is nearly inevitable that you will need to change some of your specifications during the project due to unforeseen circumstances, such as the discovery of a previously unknown water table. In case of a change order, the contract should allow the contractor reasonable extra time to complete the project.
Tags: fixed-price method, payment terms, total price, building specifications, change orders, cost-plus method, labor specifications
