With an improving economy we are seeing more home construction. Many contracts for new construction or remodeling are very hard to enforce if things go wrong. The following is a list of things you should understand as a homeowner.
The first issue is pretty simple, a written contract should attach or clearly reference any pictures, prints, plans or specs that you have reviewed with the builder to help create a budget and contract. Unfortunately, most contracts I see go into pretty good detail about the amount due, payment schedule and so on but there’s no way to know by looking at the contract what quality of home the builder agreed to. With nearly every stage of construction there is a huge range of cost on what products go into a home but if you can’t point to a specification in the contract on what type of siding, for example, is required you might get a change order request for the siding you thought was selected in the first place.
It’s pretty common that some product selections are not made until well into construction. If properly drafted, the contract should clearly list the categories that are not a fixed price but instead just an allowance and then the actual price of materials selected will adjust the final price. Flooring, plumbing and electrical fixtures, and appliances are common examples of allowance items. Be careful, however, to do a little price shopping on these items before you sign the contract. It’s too common to see builders lowball the allowance amounts to make the total contract price look affordable. The categories totally affect the look of a home and if you are only allotted $5,000 for appliances, for example, you could be very disappointed when you find out how much the appliances actually cost for the quality you had imagined.
It’s very hard to plan so well that you won’t need quite a few change orders. Each change should be in writing, specific, and clearly show not just the cost of the change order but the revised total price of the contract. It’s not uncommon to see change orders add up to 10 or 20 percent of the total contract price. Each change order might seem minor but they add up so you want to have a feel for where you are at on the total cost and what other changes might be coming.
Make sure the contract is clear when payments are due and that this payment schedule is consistent with when costs are incurred. With each draw request, you want lien waivers (basically receipts from suppliers and subcontractors) to prove your last payment was fully applied to your home. You also an updated payment schedule and amount still due with each request. When not properly managed, you may not know that you are over budget until the final pay request. You may also learn that many subcontractors have not been paid and the final payment is insufficient to cover all the remaining bills. Don’t’ just trust that the builder has a handle on the budget and payments. If you are paying through a construction loan, your bank will help you manage this process but the homeowner should always be involved too as the loan may be insufficient to cover all costs or change orders.
I hope its clear by now that building a home requires a lot of planning, attention to detail and good documentation. It’s shocking that the biggest contract many people will ever sign is signed without a focus on these basic principles.
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A reader asked for a follow up article on claims or issues you may have after you move in. Take a look at our followup article, Home Construction (Part 2).