United States: How To Build Or Renovate Your House

Building or renovating a house on Long Island can be a difficult task. Rarely does an individual spend so much money in one transaction for an item that cannot be seen or inspected prior to purchase.

There are two critical choices a person must make at the outset of such an undertaking: the first is choosing the right contractor and the second is choosing the right type of building contract.

It is important to choose a contractor with experience, a good reputation, and financial stability. Ask the contractor for the names and telephone numbers of ten of his prior customers so that you can contact them regarding his reliability and workmanship. You should visit many or all of the houses to inspect the contractor's workmanship for yourself.

Quite often, a homeowner who will give a good recommendation for a contractor will also share with you any weaknesses they perceived in his performance. Doing such a thorough investigation will alert you to your contractor's strengths and weaknesses.

Once you have completed your investigation of the contractor's prior customers, the next step is to choose the type of contract. There are three types of contracts generally used:

A Fixed-Price Contract is used when a contractor promises to complete the house as described in an attached set of architects' plans and specifications for a specific price. This type of contract is recommended because any experienced contractor is able to secure cost estimates to provide you with a guaranteed fixed price provided he is given a complete set of architectural plans and specifications to use for the price computation. Once a contractor has produced a fixed price that you find agreeable, a contract should be drawn containing provisions setting forth the agreement. Important clauses to consider:

1. payment schedule, which is often tied directly to the advances to be received under a bank construction loan;
2. starting and completion dates;
3. guarantees of material and workmanship;
4. procedure to follow if changes in the work are required or requested after the job has commenced;
5. procedures to resolve disputes without expensive litigation;
6. procedures to follow in the event the contractor fails to complete the work for any number of reasons;
7. items to be delivered by the contractor before he is entitled to final payment.

A management contract is used where a construction manager agrees to coordinate all work and payments to tradesmen for a fixed fee to be paid as the job progresses. This type of contract is used by owners who wish to take an active role in supervising the finances of the construction of their home. The construction manager coordinates all the work and payments to the tradesmen, material suppliers, and subcontractors. In return, he is paid a fixed price fee as specific items of the house are completed. Since the construction manager's own funds are not used, he is often willing to work for less of a fee. All contractors and tradesmen are paid directly by the owner. The owner reviews the bills each week and, therefore, controls costs. However, there is no fixed price guarantee from the subcontractors since the owner is, in essence, the contractor. In some contracts, a bonus is paid to the construction manager if the total job cost comes in under a certain targeted amount. For those owners who wish to take an active role in the construction of their home, a construction management contract may produce significant savings. However, the homeowner must pay cost over runs.

The last type of contract is a cost-plus contract. It has no fixed price guarantee. The contractor receives a percentage override (usually 15%) of any costs incurred on the job for materials or subcontractors. In return, the contractor promises to construct according to the attached set of plans and specifications and provide a one-year guarantee. Generally, there is little incentive other than the reputation of the contractor, for work to proceed efficiently or within projected cost estimates. Since the cost of a new home carefully designed by an architect can be pinpointed, there is little reason to proceed on a cost-plus basis for construction of a new home.

Contracts for renovations can be any one of the above three types. Again, the preference would be for a fixed-price contract. In some instances, if the renovation requires extensive remodeling of an old house, contractors are reluctant to provide a fixed-price contract, since they cannot foresee work which may be required once walls are removed, and unseen electrical or plumbing is exposed.

If the builder were adamant about not providing a fixed price for a renovation, perhaps a construction management contract with a bonus for not exceeding a targeted sum would be the best way to proceed. To enter into a cost-plus renovation contract is highly risky, since there are no legal limits on the time or costs of such work.

Needless to say, these contracts cannot be covered adequately in a one or two page pre-printed proposal. An attorney experienced in local building contracts should be retained to negotiate provisions in the contract with the contractor's attorney.