Contracts with Contractors: The Big Issues

By HomeAdvisor

Updated October 6, 2017

Signing a contract

A contract is a legally binding document that details the expectations and responsibilities of all parties involved in a home improvement project. It clarifies the goals of both homeowner and contractor, and it protects each party’s rights regarding the project. Click here to look at sample contracts .

The Big Stuff

This article addresses the broad strokes of developing a contract between you and your contractor. The finer points are addressed in another article, but keep in mind that this is simply a guide – contracts vary significantly from project to project.

Contact Information

It seems obvious, but make sure that you include in the contract the contractor’s name, physical address, phone number, insurance company and account and license numbers. If there is a dispute, you need to know where the company is located (you can’t serve a subpoena if you don’t have a physical address – a post office box number won’t do!), the company owner, the name of the insurance and bonding carriers and the way by which you can reach all involved parties.

Scope of Work

Require a complete description of the work to be done. This includes the overall scope of the work as well as individual aspects of the project: electrical, plumbing, finish carpentry, masonry, etc. The type and quality of all materials should be spelled out. Make allowances for fixtures, floor coverings, etc. that are sufficient to provide the level of quality you require.

In addition, indicate all large equipment that will remain on site for extended periods, such as scaffolding or cement mixers. If you have architectural plans, include them in this section as well.

If you decide to change the scope of the work during the job by either adding or subtracting items, you should make sure there is a written change order, with project cost and timing changes signed off on by both the contactor and homeowner.

Project Schedule

Define the project’s start date, and secure from your contractor the approximate length of time it will take to complete. Ask what potential conflicts might arise due to other projects with which your contractor is concurrently involved. You will find that most contractors are reluctant to sign a contract that includes late penalty clauses, but it still may be an item that you care to pursue. Finally, specify the time that workers will arrive and depart each day, and mention the days, if any, that they are not to work.

Schedule of Payments

There are no hard and fast rules as to how a contractor collects his or her fees. Some don’t collect until the work is completed, while others ask for 50% up front. The average is three payments; the first when the bulk of materials are delivered or when a foundation is poured; a second payment when the job is half complete; and 20% when the job is essentially complete.

Certainly you don’t want to pay and then have them absent for extended periods, but you also don’t want withhold and have the same result. Remember that this is a symbiotic relationship. It is understandable to want to be paid and likewise understandable to want your work done well and quickly. Try to be as accommodating as your budget will allow. You contractor has probably dealt with a variety of different payment structures; perhaps what you have in mind is just fine with him. If you don’t have one in mind, there are two customary ways of paying for a large job listed below:

A) Cost plus flat fee: usually there will be draws set up with the homeowner. The contractor uses the draw to pay actual vs. estimated costs, and submits all receipts and accounting on a regular basis. Flat fees average 13% to 20% and are usually paid, along with the draws, as the job progresses. This method allows great flexibility to make changes as the job proceeds, but it is more difficult to estimate the final cost.
B) Bid basis: Your contractor estimates the job, and provides a contract with all materials and fees included. You and your contractor agree on a payment schedule, referencing stages of completion in the work.

In both cases above, it is your responsibility to be certain that each stage is completed before cutting a check. If you’re not familiar enough with electrical or plumbing work, for example, to know if the proper stage has been completed to make the payment, ask a knowledgeable outside source.

Note: If financing is necessary, be certain that a clause is added stating that the contract is void unless and until financing is obtained.

Building Plans & Permits

Be sure the contractor states in writing that he/she will submit any building plans needed to the city code compliance department, obtain all necessary permits and arrange for all inspections required.

*If the work does not pass inspection, the contractor must bear the cost of corrections.

Licensing & Insurance

Do your homework on your contractor’s licensing and insurance. Contractor licensing requirements vary by state. Research these regulations prior to beginning your project, and require that your contractor provide proof of current licensing if relevant.

Mandate in your contract that the contractor provide proof of all required insurance. This should include, but may not be limited to, general liability and worker’s compensation for his or her employees.

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