Set Clear Expectations When Working with Contractors
If you're planning a building project at your site, whether it involves new construction, rehabilitation, or just light repair work, you may be apprehensive about working with a new contractor. But investing some time up front to find the right candidate and define the terms of the job may make the difference between a smoothly run project and one that is fraught with tension and conflict.
We've asked two leading industry experts to share their advice on how to set project rules and expectations, which can help to safeguard you against unforeseen or unreasonable expenses.
Ask Questions to Make Informed Decision
You need someone whom you can understand and trust to do the work that's important to your property, says development veteran Roger Harper, principal of RHarper Consulting Group, a firm that provides real estate development services. He recommends getting at least three bids and having each contractor explain to you how he would approach the work.
“It's not unusual to hear three different ways to do the job, but this will give you a basic understanding of what's involved so that you can determine which solution makes the most sense for your property,” he says. “Then have all three contractors bid on the job using the solution you've selected. This way, you've got the solution that you want, and you should be able to get it at the best price.”
Ask for Customer, Bank, and Insurance References
Get three customer references, at a minimum, from each contractor, as well as a bank and an insurance reference, says Harper. “Contractors who work on smaller projects may not be very well capitalized. If the banker is not comfortable with the contractor doing the job, it's obligated to tell you.” If the contractor cannot provide references, move on to the next candidate, he says. “And don't let a good price substitute for a lack of references.”
Develop Your Own Form Contract
Site managers should take the time in advance to develop their own form contract, says veteran construction and development litigator Scott W. Campbell, founding partner of Wallace Campbell, PLLC.
The advantage of having your own form contract “is that you're coming into the negotiation with a contract you're comfortable with and terms you know,” he says. “The end result will be closer to what you want than if you start with the contractor's contract.”
Campbell strongly recommends that site managers opt for a “fixed-bid” contract rather than a “time-and-materials” or “cost plus” contract. In a fixed bid, the contractor agrees to complete the defined scope of work for a fixed price. With a time-and-materials (T&M) contract, on the other hand, there is tremendous potential cost variability because the contractor does not commit to a set price in advance, but instead is paid for the hours worked (at agreed rates) and for materials used, plus a pre-set percentage for profit and overhead.
A fixed-price bid will be higher than a T&M estimate for the same work, because the contractor needs to build in a self-protective buffer for unexpected events, Campbell says. “But the numbers will be more realistic when it's the contractor's dollars at risk versus a nonbinding estimate for time and materials,” he says. An alternative, recommended approach is a T&M contract with a guaranteed maximum price.
Provisions to Include in Contract
“For all intents and purposes, the contract doesn't matter until something goes wrong. Then it matters tremendously,” says Campbell. “I believe in drafting the most detailed contract you reasonably can, anticipating and agreeing on as many issues as possible while relations are friendly.” He recommends including the following provisions, among others, in your form contract to avoid potential headaches down the road.
Requirements for site inspection and written change orders. “The contractor is the expert and should be better able to spot potential problems at the project,” explains Campbell. “The contract should therefore state that the contractor has had a full opportunity to inspect the project site and should make the contractor responsible for any property conditions that could reasonably have been discovered.”
To avoid surprise charges, Campbell recommends that the contract specify that, except for emergencies, no change-order work will be paid without a written change order signed by both parties. “The parties would not consider the original scope of work without a written contract; the change-order work should be no different,” Campbell explains.
Assurances of contractor's ability to pay for damages. “One of the worst and most common situations owners or property managers can find themselves in is a project where a contractor has made significant mistakes, but isn't good for the costs of those mistakes,” Campbell says. Payment and performance bonds—almost always required for public works projects—ensure that funds are available to pay such costs, but are expensive and may be impractical for small to medium-sized projects.
Campbell recommends including in the contract a pledge of financial viability that the contractor has the independent financial ability to complete the project. “Getting a signed personal guarantee from the owner of the contracting company can also be a valuable commitment,” he says.
Claim notice provisions. Make sure that your contract requires the contractor to comply with notice provisions for any claim for additional compensation. This requires contractors to notify the owner or site manager and deal with the situation immediately, rather than springing surprise news later. Notice provisions specify what and when the contractor must communicate with the owner or manager; for instance, they may include when the contractor must notify the owner of a changed condition, the deadline for providing a general estimate of costs, and the deadline for providing a fully detailed bid. The notice provision should also state that, if the contractor fails to satisfy the notice requirements, it waives its claim for additional time or money.
“Notice provisions can be powerful weapons in the hands of property owners,” Campbell explains.
Damages in the event of delay. Site managers can discourage project delays by specifying a firm Project Completion Date in the contract and providing for liquidated damages (in the form of deductions from the contract price) for every day that the project completion is delayed.
Requirement for contractor-provided liability insurance. “The contract should specify that the contractor will maintain a commercial general liability insurance policy of at least $1 million per occurrence—preferably $2 million,” Campbell says. In addition, the contract should require the contractor to maintain insurance coverage on the project for a period of time after the project, known as “products and completed operations coverage.” “This way the contractor's insurance policy will continue to protect the project even after the contractor is gone,” Campbell says. “Shoot for five years, and if you get three years, that should be fine.”
The contractor should also have the site owner and manager added as additional insureds on the contractor's liability policy, he adds.
Contractor obligations. The contractor should be obligated to the owner to the same extent that the owner is obligated to the relevant governmental entities. While standard construction contracts will include a provision that the work has to comply with all applicable building codes and regulations, “the contract should also state that the contractor is beholden to the owner to the same extent that the owner is beholden to the applicable governmental entities with jurisdiction over the project,” Campbell says. Otherwise, because building inspectors can exercise surprising discretion, if the inspector demands changes, the owner could have to bear the cost of corrections.
Once the work is under way, Harper recommends monitoring the project's progress on a daily basis. “It's a good practice to swing through the site at least twice a day,” especially in the morning just after the scheduled start time, and shortly after the end of the afternoon lunch break to see whether the contractor's workers are back on the job yet.
He also suggests keeping a photographic log over the course of the project to document its progress. “Use a digital camera with a date stamp,” Harper says. “That can be very useful in resolving disputes in cases where the contractor is not getting the work finished in the time agreed.”
Maintaining “issue files” throughout the project can save site managers much frustration and attorney's fees later if litigation arises, says Campbell. “If litigation does arise, put together a claim notebook while the project is still fresh in people's minds. Include photos, emails, relevant contract sections, costs records, etc. If a project begins to go south, you'll be able to quickly assemble the substantiating evidence for your attorney, instead of the attorney's staff having to collect that evidence. That will get you a long way down the litigation road with as little expense as possible.”
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