What to Look For in Home Renovation Contracts

It’s common knowledge that renovating your home often involves creating, signing, and reviewing contracts. If homeowners don’t have legally binding written contracts in place with the professionals they’ve hired, there is the potential for a whole world of legal and financial trouble. Most people know what’s needed in a basic contract agreement – names, what’s going to be done (scope of work), and cost – but there are some aspects that are specific to renovation contracts that the average homeowner might not know. Here, we’ll take a look at the various parts of a solid home renovation contract.

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Scope of work

After you’ve gone through the bidding process and hired a home remodeling contractor, it’s important to go over the scope of work section of your contract before signing. In fact, specialists calls this the most important part of the contract, and there are a few essentials to keep in mind when going over the scope of work with the home remodeling contractor you’ve hired.

First, the average homeowner is at a slight disadvantage as far as estimating remodeling costs so he/she will want to make sure the scope of work is as detailed as possible. Instead of saying, “Contractor will install poles and shelving in a walk-in closet,” consider other specific aspects that might affect the cost, such as materials and quantities, and make sure to specify them in writing.

Second, the homeowner will want to be specific with regard to the timeline. Start and end dates are standard in contracts, but it might be in the homeowner’s best interest to include milestones along the way if the project is extensive. This will ensure that workers are making progress as promised, and also increases the likelihood that it will end on the agreed upon date.

Finally, homeowners should be sure to ask questions if anything is unclear. Two of the most important questions homeowners can ask are:

• Will there be any extra cost to complete this project?
• Will there be any hookup, inspection, impact, or other fees added?   

Bid inclusion

With a detailed scope of work, the bid should be inclusive, but it’s always a good idea to make sure. Homeowners will want to ask about additional costs, such as temporary power, sanitation, fencing, and other site preparation materials, as well as any cleanup fees once everything is done. Making assumptions on these fronts could add up when the final bill comes due.

Other items homeowners might not know to ask about include:

• Testing and removal of hazardous materials
• Required rerouting of plumbing, ductwork, and wiring
• Moving of furniture, equipment, and supplies
• Repair of damage to adjacent rooms
• Repair of damage (done by workers) to roadways, walkways, patios, or landscaping

Quality standards

Homeowners may think building codes require a contractor’s work to meet a certain level of quality, but inspectors are only looking for a minimum safety requirement. That’s why it is especially important to establish standards of quality in the specifications portion of the contract. This is often not included in residential construction contracts. Professional architects and construction managers will know the relevant industry specifications for materials and systems, but if you don’t have one of these professionals on your project, here are some guidelines to follow:

• Specify that contractors are to follow all manufacturers’ written instructions.
• Include the phrase “workmanlike manner,” which will give you a legal leg to stand on if any disputes end up in court.
• Many construction products come with their own standards published by trade associations. Make sure to put it in the contract that your professionals are expected to know and follow them.

Most homeowners want any new additions to match the existing structure, but this can add a degree of difficulty to a project that might affect the timeline and cost. Making sure to hire a contractor who is experienced in remodeling, not just new construction, is of the utmost importance if this is a priority. The contract should include that the owner approves matches to ensure the end result is satisfactory.

Ultimately, the best way homeowners can ensure high-quality work is to do their research beforehand. Go and see previous jobs and talk with references from people who have worked with the contractor you’re thinking of hiring.

Allowances

No, this isn’t what teenagers ask for. Allowances are basically a contractor’s best guess at the cost of materials. There’s a seemingly endless amount of decisions that go into a home renovation, and sometimes all variables can’t be accounted for during the bid-making process. Allowances provide some wiggle room. But homeowners will want to make sure they’re not leaving too much room. To avoid being taken advantage of, homeowners can do basic research on the average cost of the materials they plan on using. For example, if a contractor adds an allowance of $15,000 for kitchen cabinets and countertops, but the homeowner knows the countertops they want average $1,500, he/she will be better equipped to call the contractor out on overly padding the budget.

Agreement changes

Renovation contracts should outline a detailed process for contractors to follow if and when there are changes on a project. A detailed scope of work and highly inclusive bid should minimize these instances, but there is bound to be at least one or two unexpected turns – generally referred to as “hidden or changed conditions” – during the process.

To avoid nasty surprises after the fact, homeowners should consider requiring written consent on changes for things such as materials or timelines. Some people may shy away from this idea, not wishing to come off as a micromanager, but ultimately it is the best way to ensure you are fully aware of what is happening during your project. Change orders can cause delays and be costly, so outlining their use in detail can save both parties a lot of hassle.

Additionally, including clauses that protect the homeowner from responsibility for hidden and/or changed conditions should be stipulated here. These clauses should include language that places most of the responsibility on the contractor to thoroughly inspect the job site for potential and suspected issues. For example, the American Institute of Architect’s (AIA) short-form contract A105 includes the following:

“8.1.2 The Contractor shall carefully study and compare the Contract Documents with each other and with information furnished by the Owner. Before commencing activities, the Contractor shall (1) take field measurements and verify field conditions; (2) carefully compare this and other information known to the Contractor with the Contract Documents; and (3) promptly report errors, inconsistencies or omissions discovered to the Architect.”

(If there is no architect involved, it can be replaced with “Owner.”)

Insurance

With all the risks involved in construction and renovation, insurance is a good thing to look into. There are three main types of insurance necessary to cover the standard risks: General Liability, Workers Compensation, and Builder’s Risk or Course of Construction.

General Liability insurance covers harm to non-workers or property caused by construction. The contractor typically holds this policy, but homeowners will want to make sure they get it in writing that he/she is in fact covered. Workers Compensation covers injury to workers and is again held by the contractor.

Homeowners should check their insurance policies for a Builder’s Risk policy, or Course of Construction coverage, which takes care of building or material damage from fire, wind, or theft. This is the insurance that is solely the responsibility of the homeowner. If their Homeowners Insurance does not cover renovations, separate policies can be obtained.

In the end, the homeowner is responsible for anything that could go wrong if the contractor does not have the proper insurance. Additional protection can be provided by including an indemnification, or “hold harmless,” clause in the contract. This is the best way to make sure a contractor or third party cannot sue the homeowner if there is an accident and the contractor is underinsured. Of course, the broader the clause, the less the homeowner is potentially liable for.

Homeowners might also want to request that a contractor provide a lien release, which will protect them from liability in the event the contractor fails to pay any or all subcontractors.

‘Time is of the essence’ and liquidated damages clauses

These are two clauses that create serious penalties for missed deadlines. If it is absolutely critical that a job be completed by the agreed upon date, homeowners should consider adding one of these clauses to their contracts.

“Time is of the essence” clauses treat a missed deadline as a material breach of contract, which means the homeowner can sue the contractor. These clauses help stress how important the completion date is to you, but if the clause is seen as unfair it may not hold up in court.

Liquidated damages clauses come with a price tag, for both parties. This clause requires contractors to pay a flat sum per day if a project is delayed. Typically, this clause is included in cases where homeowners have sold their home, have to move by a certain date, and will incur expenses such as hotel rooms and storage fees in the event of a delay. Because this means the risk in taking the job is higher for the contractor, it will probably be factored into the overall cost of the job.

Home renovations can be stressful, and come with plenty of opportunities for things to go wrong. Carefully crafted contracts that include these terms and conditions can save homeowners and contractors a lot of potential headaches.  

Written by Megan Rynott. January 15, 2016

Megan is a professional writer, editor, and home design enthusiast based in California.