- The Washington Times - Thursday, October 7, 2004

The phrase “it’s a standard contract” can cause a sinking feeling in a homeowner about plunking down thousands of dollars on a major remodeling project. It should. Although the majority of builders are reputable and tend to fulfill their clients’ needs, consumers should always be certain to read and understand the contracts they sign and to consult an experienced attorney if they have doubts about any aspect of the contract.

Often, custom-home builders will work with an architect and with a builder on separate contracts. Both contracts should be carefully reviewed.

“People live and die by that infamous phrase ‘standard contract,’” says Jerry Friedlander, an attorney with Friedlander, Friedlander & Earman in McLean.

“There are a variety of standard contracts provided by builders, and some of them are better than others,” he says. “The biggest mistake people make when they hire a remodeling contractor or a custom builder is to believe that they can do the contract themselves, then get help later if there’s a problem. They don’t understand that their rights rise no higher than what the contract says. Judges will enforce the contract as written, regardless of whether the consumer says they didn’t read it or didn’t understand it.”

Many consumers choose to sign a contract without paying for the expertise of an attorney, but when a buyer is opting to make a major investment in a home addition or a new home, the additional cost for professional advice can be worth it.

“It’s pretty clear when someone is investing in a $500,000 job that they need to have a lawyer look over the contract, but not as clear when it is a $50,000 job,” says Vince Keegan, an attorney with Keegan & Sotelo in Fairfax.

“People just need to weigh the costs against the benefits. Most often, calls come into us after the fact, when there’s a problem with a contractor,” he says. “Consumers need to realize that contracts vary widely and that they are mainly slanted in favor of the builder because it is the builder or the builder’s lawyer who’s writing them.”

Even before deciding to have a lawyer review the contract, consumers can begin to protect themselves by carefully researching the builder they choose.

The National Association of the Remodeling Industry (NARI) recommends that homeowners ask potential contractors how long they have been in business and whether they will use subcontractors or employees to work on the project. Also, they should ask the potential contractor to provide a list of recent references, including homeowners and business referrals.

Check with the Better Business Bureau and local consumer protection agencies to see if any complaints have been filed against the contractor.

The National Association of Home Builders provides a list of warning signs for consumers that can help protect them against fraud, including being skeptical of contractors who solicit business door to door and those who ask for payment in full in advance or payment only in cash.

Once consumers have chosen a builder or contractor, the next step is to review the contract.

“Contracts should be clear and concise, with as many exhibits as possible,” Mr. Keegan says.

“Buyers should look for elevations and floor plans and specifications with as much detail as possible, and then they should go over each exhibit and initial it so there are no questions later as to which exhibits were reviewed,” he says. “If the builder will be using subcontractors, then the general contractor should be specified in the contract as the responsible contractor.”

Some custom-home buyers purchase land and then locate an architect and builder, while others work with a builder who owns the lot on which the home will be constructed.

Mr. Friedlander says: “Obviously, when the consumer owns the land, they are in a stronger position. In some cases, the builder is willing to transfer title to the buyer during the building process.

“If not, the consumer is in danger of losing both the land and the home if there’s a dispute. Sometimes a contract can be written so that either the builder or the owner can terminate the contract if the home is not completed within a certain amount of time, with the return of the buyer’s deposit,” he says. “But while the buyer in that case may not have lost money, they will have lost the opportunity to build their dream house in that particular location. It’s important to carefully review the contract and decide if you are willing to live with the terms.”

After the initial contracts are negotiated and signed with an architect and/or a builder, permits must be obtained from the city or county in which the property is located. Contractors will often obtain the permits, but they are normally listed in the owner’s name.

“Codes have been written in every jurisdiction for the safety of consumers, and responsible owners will check to be sure the work they are having done is not only permitted but later inspected and approved by their local jurisdiction,” says Carol Blumenthal, an attorney with Blumenthal & Shanley in Washington.

Once a project is under way, the main control a consumer will have over the project is when the “draws” take place, meaning when the bank releases a portion of the financing to the builder to pay for materials and other costs.

Some builders prefer to have the majority of the money upfront to make it unnecessary to continually request more funds, but it is wiser for the consumer to even out the draws to make them commensurate with the work being completed, if possible.

The timeline for the cash flow should be stated in the initial contract.

“Buyers should at least keep back 5 to 10 percent of the payment which was negotiated upfront until the project has been completed to their satisfaction,” Mr. Friedlander says.

The best way to make sure that the work is being completed satisfactorily is a continual series of timely inspections.

Lenders will usually send inspectors to make certain that, for example, the project actually is 80 percent complete when the builder states that it is.

Buyers may want to have an independent professional inspect the project, such as an architect or a consultant, or, at the very least, inspect the property themselves on a regular basis.

Although following the written plans from the contract is crucial, many custom home and remodeling projects require changes to the plans once the project is under way.

Sometimes the changes are needed because of discoveries of additional required work in order to properly complete the remodeling job or the difficulty in obtaining a particular chosen material for cabinets, flooring or counters.

Quite often, buyers change their minds as the building process continues, and they request a new design or a new material to be used.

“Most major disputes between homeowners and contractors tend to be over change orders,” Ms. Blumenthal says.

“For instance, when a bathroom is being remodeled and the owner decides to add a Jacuzzi, they don’t always realize that it’s not just the Jacuzzi that will cost them more money but that an electrician will need to be brought in,” she says. “Each change which is made may have an impact on the ultimate cost of the project. Consumers need to make sure that not only is the initial contract as specific as possible in terms of grades and types of materials to be used, but that each change order is documented in writing. Even if there is no charge for the change, that fact should be put in writing.”

Another important issue for custom home and remodeling projects is the need for workers’ compensation and liability insurance.

“Consumers need to make sure they see a copy of the certificate of insurance from the builder and that the insurance names the owner as the additional insured party,” Mr. Keegan says.

The NARI recommends verifying the insurance by calling the insurance agency to be certain that it has not been canceled by either party.

A larger concern related to subcontractors is the potential for mechanics’ liens against the property if the general contractor has not paid them in full for their work.

“A problem that some people have that they don’t think about in advance is that if they have a large remodeling job or a custom home built, their contractor will need to subcontract some of the work,” Ms. Blumenthal says. “Consumers need to have in writing that as a condition of their final payment to the builder that the contractor must provide written proof that all subcontractors have been paid, and all subcontractors need to provide written releases. If these subcontractors have not been paid, they can put a lien on the property, which can be a significant problem when someone wants to refinance or sell the property.”

As Mr. Friedlander explains, “Anyone who improves real estate can file a lien, so consumers must require their contractor to identify all their subcontractors and all their suppliers so they know where to check to be sure they have been paid.”

In addition to making sure everyone has been paid at the end of the project, consumers should also be vigilant in checking to see that they have received all the appropriate warranties.

“The initial contract should explain what warranties are coming to you when the work is complete and who they are coming from,” Ms. Blumenthal says. “For instance, if someone is having a roof redone, they need a warranty for the actual material used, which should come from the manufacturer, plus warranty for the installation from the contractor or subcontractor.”

Contractors can obtain a permit of occupancy when the custom home project is essentially complete and the home can be occupied, and sometimes this is when the final payment is due.

However, at the walk-through inspection by the buyers, there might be small items that need to be completed before they are satisfied with the project.

A consumer who is unhappy with the quality of the work needs to return to the contract to determine whether the job has been done as it was stated in writing.

The contract should provide for some portion of the total payment to be withheld until the job is completed to the specifications.

Because the livelihood of builders depends on their reputation for completing quality work, the majority of builders will do everything they can to make sure their customers are satisfied.

The legal protections recommended by attorneys provide additional peace of mind for consumers, but the real security lies in choosing a reliable contractor from the beginning.

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