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11/20/07: Remodeling? Use A Consumer-Friendly Contract

HOUSING COUNSEL

By Benny L. Kass


Do you plan on doing any work in your house? Will you be using a contractor? If so, whether this is a small job or a major renovation, there are a number of steps you must take to protect yourself.

First, the contractor must be licensed in the jurisdiction where your property is located. When you have selected the contractor, insist on getting a copy of his/her license. Call the government agency that issued the license, to confirm that it is still current.

Next, contact your homeowner insurance company to determine the extent of your coverage should accidents or damage occur while the work is being done.

Negotiate all terms and conditions - including the cost of the job - with the contractor. When you have reached agreement, it must be reduced to a written contract.

Many contractors use what I call the "two page special". This is a simple contract which merely states who the contractor is, a very general description of the work to be done, and the total cost of the job.

Such a document is not in your best interest.

The American Institute of Architects (AIA), headquartered in Washington, D.C., publishes a number of contract forms for use by homeowners, architects, and contractors. According to a recent press release, announcing their most recent updated contracts, "since 1857, the AIA has represented the professional interests of America's architects. As AIA members, over 80,000 licensed architects, emerging professionals, and allied partners express their commitment to excellence in design and livability in our nation's buildings and communities."

There are a number of different AIA forms available, depending on the type and size of work which you plan to do. For example, form A105, is a standard form of agreement between owner and contractor for a residential or small commercial project. Form A107 - which is more comprehensive -- can also be used for projects of limited scope.

Every ten years, AIA updates their forms, in order to reflect changes in industry trends and practices. On November 5th of this year, they released their latest forms, and made a number of significant changes.

  • Arbitration is not mandatory. Prior to this year, the AIA contracts required that if the homeowner and the contractor could not resolve any disputes on their own, they were required to go to binding arbitration. The revised forms now permit the parties to negotiate other alternatives, including litigation, Many consumers are learning that arbitration may not be the best way to resolve the problems they have with their contractors, even though litigation may be more expensive and take more time than arbitration. Often, the arbitrator does not issue a written opinion explaining how and why the decision was made, which leaves both contractor and homeowner in the dark. And our legal system will generally not reverse an arbitrator's decision, unless it can be demonstrated that the arbitrator was biased or arbitrary. And how can this be presented to a Judge when there is no written opinion?
  • initial decision maker. According to AIA, previous versions of their form contracts "assigned the architect the role of serving as a neutral party to decide disputes between the owner and contractor. The 2007 Update provides the owner and contractor with the opportunity to hire a third-party initial decision maker (IDM) for dispute resolution."
  • access to financial information. The new forms prohibit the contractor from requesting financial information from the owner after the work has begun - even if the contractor may have reason to be concerned about the owner's ability to pay.

One important provision in the revised contract forms deals with subcontractors. Homeowners often learn that although they have been paying the contractor, the subcontractors who are working on the job are not being paid. According to AIA, "the revisions also allow the owner a greater opportunity to learn of contractor/subcontractor payment problems, and address a contractor's failure to pay a subcontractor by allowing the owner to write joint checks".

One of the most common problems that homeowner's encounter with their contractor is that they often pay most if not all of the entire contract sum when the work is far from completed. Some contracts call for an initial down payment and the balance is due when the work has been finished. Other contracts - especially those with a larger scope of work - will have a draw schedule prepared and made a part of the contract documents. This schedule will spell out when additional payments are to be made based on performance of the work.

If there is an architect involved, he/she will normally be the gatekeeper for the draws.. The contractor must submit requests for payments, which must be approved by the architect. However, many homeowners do not use the services of an architect, and have to rely on the contractor's representations as to what was done.

It is critical to keep a portion of the final payment until you - or your architect or the IDM - are completely satisfied that the work has been done, and that all subcontractors have been paid in full. It is a good idea to have the general contractor and all subs sign a statement to this effect. You do not want to discover later that the subcontractors have filed mechanics' liens against your property.

Perhaps the most common complaint that arises involves changes to the scope of work. As the job progresses, the homeowners may ask the contractor to add another cabinet, or install more electrical outlets. The contractor does the requested work, and at the end of the job, submits a bill for these changes. By that time, since memories are short, the homeowner disputes that the work was ever authorized.

All change orders must be in writing, spelling out the work to be done and any additional costs. Both the homeowner and the contractor must sign this change order document. Contractors are notoriously lax in adhering to this practice, which is why there are so many disputes.

Another important provision that should be included in all contracts deals with ending the relationship. If you become dissatisfied with the quality of the work, or find that the contractor has taken another job and has stopped working (or slowed down), what can you do? Most "two page specials" are silent on this issue. However, all AIA form contracts have clear language that gives protection to the homeowner. For example, the following language can be found in Form A105:

The Owner may terminate the Contract if the Contractor
(1) repeatedly refuses or fails to supply enough properly
skilled workers or proper materials; (2) fails to make payments
to subcontractors...; (3) persistently disregards laws, ...or
(4) is otherwise guilty of substantial breach of... the Contract....

If any of these events occur, the homeowner - after giving the contractor seven days notice - may terminate the contract, and hire another contractor. If the unpaid balance owed the contractor is more than the cost of finishing the job, the homeowner still owes the original contractor the difference. But if the cost to complete the work is more than the original contract price, which is often the case, the homeowner can look to the terminated contractor for payment of this difference.

It is often easier and faster to enter into a simple two-page contract for the work that you want done in your home. And because many contractors are competent and honest, everything will probably work out.

But unless you include all of the protections suggested above, you are at the mercy of that "two-page special" which can come back to haunt you if and when problems arise. A Judge will honor any binding contract which you have signed, even if it is one-sided in favor of the contractor.

The AIA contract forms are designed to give you the protections you need. You may want to tailor those contracts to your particular needs, but they are accepted in the industry and should be used by all homeowners.

The forms can be purchased directly from AIA, on its website (www.AIA.org).

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