If you are thinking about a construction project, you should be aware of the different types of construction contracts, general contractor license requirements and the use of subcontractors. Broadly speaking, there are two main typesof construction contracts: fixed price and time and material.
The Fixed Price Construction Contract
A fixed price contract says that the contractor will supply all labor and materials necessary to construct the project for a fixed price. A time and material contract says that the contractor will supply all labor and materials necessary to construct the project usually at hourly rates for labor, and at cost plus a mark-up for materials.
A genuine fixed price construction contract is a rare animal, because of the difficulty the owner faces in determining the exact specifications for the project. For example, if the project is a custom house, the owner will generally be unwilling or unable to decide up front upon every detail. Furthermore, the owner may change specifications as work progresses. The usual remedy for indecision is to establish an “allowance” for undecided items or categories, such as lighting fixtures. If the customer selects fixtures costing less than the allowance amount, the “fixed price” will go down. If more, it will go up. The usual remedy for a change is a “change order,” providing specification for the change and the amount. If the change requires less labor and material, the “fixed price” will go down. If more, it will go up. Don’t be afraid to negotiate.
Building A Custom Home
Custom houses typically end up costing much more than the contract’s estimable “fixed price,” which in practice turns out to be only an estimate. Large organizations requesting bids from contractors for large complex projects try to reduce the risk of cost overruns by exhaustive detailed specifications for every aspect of the project. This sometimes becomes counterproductive, particularly when the large organization is the government (e.g., the $500 hammer).
Time and material contracts are difficult to administer, both for the contractor and the owner. Time records tend to be inflated, and more expensive materials tend to be used. The owner’s potential remedy is to establish a “not to exceed” total price for the project. Another variant is time and material plus a fee.
General Contractor Licensing and Subcontractors
There is no guaranteed way to avoid poor workmanship and untimely performance. Here are a few pointers:
- Make sure the contractor is licensed. “Borrowing” someone else’s license is illegal, but widespread. Always check the State Contractors Licensing Board and make sure the contractor has his/her own license. Anyone who doesn’t care about having a genuine license is not going to care about doing professional grade work.
- Obtain references from the contractor. Don’t assume references would be favorable and fail to call them. Some contractors are betting you won’t follow up. Some will also give you phony references.
- A contract for repairs or improvements to a residence is a special construction contract called a “home improvement contract.” It’s legally required to have certain terms and conditions. A contractor who doesn’t use a compliant home improvement contract is operating illegally. Google “California Home Improvement Contract” to see what one should look like.
- Always get at least three bids. Other things being equal, throw out the top and the bottom and take the middle. The bottom bidder is likely to be bidding less than the project will actually cost. If so, he/she will attempt to make up this difference by shoddy work and inferior materials, as well as questionable change orders.
- Always get a contemporaneous written change order for every change, describing the change and setting the cost. Otherwise, you can be taken advantage of.
- You are only required to pay for work already performed. If a contractor demands to be paid a higher percentage of the contract price than the percentage of the work that the contractor has finished, they are probably stealing from Peter to pay Paul. Don’t fall for it.
- Inspect the work daily. If it doesn’t look right to you, it probably isn’t. Don’t allow yourself to be bullied. On a major project, a professional construction inspector hired and paid for by you is worth the extra expense.
- Avoid contractors who use pick up labor. Try to use a contractor who does the work with his own regular full-time employees. If a contractor is a general contractor and uses subcontractors, make sure all the subcontractors are licensed, they have long term relationship with the general contractor, and they aren’t using pick up labor. Plumbing, HVAC, tile, and electrical work are typically performed by subcontractors. Cabinet installers must be licensed as well.
- Don’t expect the State Contractors License Board to save you if the project goes south. Its job is to impose fines and/or suspend licenses. It cannot order a contractor (or anyone else) to correct defective work, complete a job, or pay you damages. (It is possible for a contractor to agree to binding arbitration under the auspices of the Board, but virtually unheard of.)
Good luck! You’ll probably need it.
San Diego Attorney Stanley D. Prowse is a Civil Litigation Attorney specializing in California Construction Law.
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