What’s First When Creating a Construction Contract?
Updated: Oct 22, 2021
Initial considerations: WHO is responsible for paying you and WHAT are they paying for?
We know contractors are extra busy these days – which is a great problem to have – but in the rush to get the work done, don’t forget to make sure you are legally protected. Clearing up a few essential things on the front end will avoid confusion and uncertainty down the road.
With that in mind, let’s start from the top!
First and foremost, you need to know who should sign your contract - on both sides!
This may seem obvious, but if you get it wrong, it can pose serious problems. If you’ve formed a company (or corporation), then you should sign as a member of the company or officer of the corporation. The legal name of your company should be listed on the contract. (You’ll know if you have a “legal name” if you have registered your company with the Georgia Secretary of State.) The name of your company listed on your contract should match the name that’s registered with the Secretary of State. If you need a reminder, you can do a quick search at www.ga.sos.gov to review your company’s name. For example, let’s say your registered company name is Central Georgia Kitchens and Bathrooms, Inc. That’s the name that should be listed on your contract – not a shortened version, such as Central Georgia Kitchens.
Here’s why accuracy is important: if you sign a contract in the name of a company that doesn’t actually exist, then you could become personally liable. Being personally liable means that your personal assets are at stake if something goes wrong. One of the reasons you formed a company was to shift liability away from you. Therefore, it’s important to double check the accuracy of your agreement and names therein.
But what about D/B/A’s? D/B/A means “doing business as.” You might operate under a d/b/a name that’s different from what is registered with the Secretary of State. If so, then you will need to list your company’s legal name followed by your d/b/a name. In the example above, you would write Central Georgia Kitchens and Bathrooms, Inc. d/b/a Central Georgia Kitchens. So don’t just list your d/b/a name, since that is not the name of your registered company.
NOTE: The tips above only apply if you have a registered business and it’s possible to have a d/b/a name without having a registered legal business. In that case, you are considered a sole proprietor. Your d/b/a name is just for advertising or branding purposes, and does not protect you from legal liability.
Conversely, it’s important that the person you are contracting with has the authority to sign an agreement with you. Make sure the actual homeowner signs the agreement, and not the spouse/partner (or significant other) who may not be on the deed. Similarly, if you’re contracting with another company, make sure their company name is legally accurate - as described above.This is important for many reasons, not the least because the named person or business is who is responsible for paying you for your work.
Now that you know WHO will be paying you, let’s talk about WHAT they are paying for.
Most residential contractors believe they have a fixed price contract. They submit a bid, which the homeowner accepts, and that price is included in the contract. In reality, though, most contracts are hybrids: a combination of fixed and fluctuating costs. For instance, the contract may specify a $5,000 allowance for appliances, but the actual cost may end up being $6,000. The contractor almost certainly would expect to receive the additional $1,000.
If you have a hybrid contract, make sure the contract specifies which prices are subject to adjustment. In the appliance example above, you would need to ensure your contract requires the owner to pay costs in excess of the allowance amount. And it may also be a good idea to document any excess costs as a formal change order.
Ambiguity and uncertainty lead to disputes. A true fixed price contract should be just that: fixed. It should not be subject to adjustment unless there’s a change order. To create a true fixed price agreement, you will want to bid the project very carefully. Think through the Scope of Work carefully considering all the appliances, fixtures, etc. that the home will need, as well as the quality of these items, so that you can form an accurate bid. For instance, an allowance for fixtures in a custom home should be higher than the same fixture allowance in a standard one.
The common alternative to a fixed price contract is a Cost Plus agreement. A cost plus agreement compensates the builder for their actual material costs plus an agreed-upon percentage on top of that cost for overhead and profit. A cost plus agreement solves a lot of common problems. For one, it does not require the builder to estimate a price for unknown allowances. Since the cost isn’t fixed, however, homeowners (and lenders) are reluctant to agree to them for fear that there will be significant cost overruns. One solution to this problem is to build in a “cap.” That is, the contract would specify that the costs would not exceed a certain agreed-upon amount (absent a change order).
Knowing who is responsible for paying you and what they will be paying for are the first two steps towards a solid construction contract - one that best protects YOUR interests. If you think your contract needs some help and you don’t know where to start – we are here for you at Downs Law! Reach out to us anytime for help with a new contract or a contract review. We’re also here for your other construction litigation needs. Check out our offerings and contact us here.