AWARD THE CONSTRUCTION CONTRACT
Should you hire a contractor or manage the construction process yourself as an owner-builder? It’s your choice, and to some, it’s a no-brainer. To others, it’s a tough decision, Managing a construction project is usually outside of most people’s expertise so they choose to hire someone. If you decide to manage the process yourself as an owner-builder make sure you’re fully up for the task.
Regardless of who manages the construction process, you’ll need to be familiar with construction contracts and how to hire qualified professionals to build the project. Even as an owner-builder you’ll likely hire specialized contractors to handle parts of the construction that you’re not familiar with so this section will still be relevant to you.
In this section, you’ll familiarize yourself with how to choose qualified contractors. You’ll also learn about the different types of construction contracts, what options exist for fee structures, and how to execute a contract.
- In a traditional Design-Bid-Build or Design-Negotiate-Build setting, the contractor is typically chosen after the design is finalized. There are exceptions to this timing where you hire a contractor for pre-construction services such as cost estimating and consulting for constructibility purposes but a majority of the time the contractor is brought on board later.
- For Design-Build project delivery projects, you will engage with your builder much earlier in the process before even beginning to design your project and work with them throughout the design and construction process.
Regardless of the project delivery method you choose, the process of selecting well-qualified people to build your project is the same. It’s just the timing that varies. We’ve chosen to discuss this topic at this point in the process because most custom home projects are architect-led and most frequently result in Design-Bid-Build or Design-Negotiate-Build scenarios.
FIND A SUITABLE BUILDER/CONTRACTOR
Whether you’re looking to hire a builder, general contractor, or subcontractor, it’s important to select well-qualified professionals who can demonstrate their ability in building projects similar to yours and within the timeframe and budget you’ve defined. If you are uncertain about any of those issues with any of the contractors you’re interested in, ask for more supporting evidence or reconsider your selection.
There is no set time or deadline in selecting a contractor as long as you give them sufficient time to mobilize and get everything ready before the start date. Many people opt to engage a contractor early in the design process so that the contractor can actively participate in the design decisions and offer input on cost estimates, construct-ability, sequencing issues, and scheduling. Others choose to wait until they’re nearing construction to start searching for and hiring contractors.
To make the right selection you must make sure they’re qualified, reputable, have good workmanship, compatible with you, and can agree with you on cost.
A good selection process will help you select the right contractor for your job. Here’s a quick rundown of the process:
- Know what you want in a project
- Find contractors
- Research each contractor
- Interview each remaining contractor
- Investigate & check references
- Make your selection & sign a contract
For more on a good step-by-step process to follow, see How to Find the Right Contractor For Your Home Project.
CONSTRUCTION CONTRACT TYPES
Contracts between you and your builder or contractor spell out everything in writing that you both agree to and include a bunch of legal clauses in case a dispute arises. Contracts are legally binding documents so make sure you read and understand them thoroughly before signing them. Contracts include the project scope, the roles and responsibilities of each party, terms of payment, schedule, and dispute resolution procedures, along with a few other things.
Defining the cost of construction in the contract
There are a few different ways to determine the cost of construction as it’s defined in your construction contract. Here are the most common methods:
- Cost-plus fee or percentage (Also called a time and materials contract) – The contractor bills you for the actual costs incurred on the project and then adds an agreed upon percentage or fee markup for overhead and profit.
- A downside to this approach is that it doesn’t encourage the contractor to find ways of reducing costs.
- To mitigate this: Consider adding an incentive to the contract should the contractor build the house under budget and on time.
- GMP (Guaranteed Maximum Price) – A variation of the cost-plus contract where compensation is based on actual costs incurred on the project (plus a fixed fee for overhead & profit) AND is capped at a maximum amount agreed upon by both parties. In this case, the contractor is responsible for all cost overruns, but also gets to pocket any savings resulting from cost under-runs.
- Considerations: For those who choose a GMP, consider adding a clause in the contract that both parties will share in the cost savings if the actual cost of construction is less than the agreed upon GMP as an incentive to keep costs low.
- Stipulated Sum (Lump sum) – An agreed upon cost of construction is determined at the time the contract is signed for the entire project. The contractor makes his profit on the difference between that price estimate and the actual cost of construction for labor and materials. (FYI: Many lenders require a fixed price contract like this because it protects them from cost overruns.)
- Downsides to this type of contract are that it encourages the contractor to find ways to reduce costs at the expense of quality so they can pocket more profit.
- This also requires careful watch during construction that the specified materials are installed. Any substitutions should be vetted by you and the design team and if approved should result in a change order to reduce the overall cost of construction of the contract.
The method for determining the cost of construction is up to you, your bank lender, and your contractor to determine. Each has their pros and cons. But you and your contractor have to agree on the cost and payment terms in order to sign a contract. All your hard work in selecting your contractor is irrelevant if you can’t agree on the cost and payment terms.
What Construction Contract Template To Use
After you’ve found a qualified contractor and agreed on a cost and payment structure, you can finalize the agreement and put everything in writing. There are various industry-standard contracts to use that have been vetted by industry experts, but it’s ultimately up to you, your chosen contractor, and your attorney as to which contract to use.
Here’s a brief list of the most popular ones.
Many of these industry standard documents are very similar in nature with small nuances and differences. Most likely if you’re working with an architect, they will suggest an AIA Contract because they are very familiar with them. If not, your contractor may suggest either the Consensus Docs or your engineer may suggest EJCDC Docs.
- AIA Contract Documents – These are contracts prepared by the American Institute of Architects with the consensus of all the various parties involved. The documents have been finely tuned over the past 100 years and, as a result, are now widely recognized as the industry standard by architects, contractors, owners, consultants, and attorneys.
- Consensus Docs – These contracts incorporate best practices and fairly allocate risk to help reduce costly contingencies and adversarial negotiations. They are developed by leading industry associations to protect the best interests of the project rather than a singular party, yielding better project results and fewer disputes.
- EJCDC Documents – The Engineers Joint Contract Documents Committee has developed and updated fair and objective standard documents that represent the latest and best thinking in contractual relations between all parties involved in engineering design and construction projects.
- Contractor-provided contract – A standard contract regularly used by the contractor on his or her projects. Whether or not the contract is an industry standard or represents all parties fairly is hit or miss. Review these contracts very carefully with your legal counsel and don’t be afraid to request modifications.
- Owner-provided contract – If you regularly engage in building projects you may have created a standard contract with your attorney to use on your construction projects. Your contractor will want to review this contract and may want to make modifications so be prepared to discuss the terms with him or her.
After you’ve decided which construction contract to use, review the contract terms very carefully. Do your best to negotiate the terms so that all parties benefit. And make sure you have your attorney review the contract, especially if you’re inexperienced in contract negotiation or feel like you need additional guidance.
When you and your contractor have agreed on all terms, both parties will sign the agreement making it a legally binding document. The contract can be changed at a later date provided you and your contractor both agree to make the changes (preferably in writing).
- Find suitable contractors/builders.
- Research and interview each qualified contractor. Visit their projects and speak with past clients of each
- Discuss the construction cost (or the method for determining the cost) with each qualified contractors.
- Select your chosen contractor and define how the construction cost will be defined in your contract.
- Determine which construction contract template to use.
- Review the construction contract thoroughly and with legal council.
- Sign the construction contract with your chosen contractor.
Need more help? Here are additional resources related to this section.
- Top 5 Mistakes To Avoid When Designing & Building a New Home
- How To Find The Right Contractor For Your Home
- Do I Need to Hire a Licensed Contractor?
All downloadable resources can be found in our Resource Library. Sign up to gain exclusive access.
- Contractor Selection Process Checklist
- Contractor/Builder Qualification Worksheets
- Sample Interview Questions To Ask Prospective Builders/Contractors
- Cheat Sheet to Construction Contract Requirements
Over To You…
Congratulations! You’ve made it through the “less fun” but oh-so-important process of selecting and hiring a contractor. You understand the importance of selecting a qualified construction team and one that you feel you can work with to create this dream project of yours. You’re serious about moving this project forward and even put it all in writing.
Only one thing left to do – BUILD!