Constructing a custom home is an exhilarating journey, but it can also be daunting, especially when it comes to the legalities and agreements involved. A well-drafted builder agreement with key terms is paramount to ensuring a smooth and successful project and knowing the agreement’s key terms is super important. Among the many terms, several key elements demand careful consideration and clarity to avoid misunderstandings or disputes.
The advice below is not from an attorney, nor should you consider it legal advice.
If you happen to be a real estate or construction attorney, feel free to review and provide feedback on your builder’s agreement, but I still ask for a lawyer’s review and feedback when reviewing complex agreements.
Having said that, below are some of the important terms in every custom home construction agreement that you should understand.
Change Orders: Change is inevitable in any construction project. Change orders document modifications to the original plan, whether it's a design alteration, material substitution, or scope adjustment. The agreement must clearly document the process for initiating, approving, and implementing change orders, including how they impact the timeline and budget. Additionally, make sure you understand how the cost of these changes will be calculated and when payment is expected.
Closing Date: The closing date signifies the completion and turnover of the property to the homeowner. Establishing a realistic closing date is essential for planning and coordination. The agreement should define the conditions that must be met for the project to reach completion (e.g., Receipt of the Certificate of Occupancy, Final Payment, Punch List Agreement). Equally important, find out what is required if you wish to extend that date.
Communication: Effective communication is the cornerstone of successful project management. The agreement should specify the preferred modes of communication (e.g., written, verbal), frequency of updates, and key points of contact for both the homeowner and the construction team. Establishing clear lines of communication fosters transparency and minimizes misunderstandings.
Dispute Resolution: Despite careful planning, disagreements may arise during the construction process. A well-defined dispute resolution mechanism can prevent conflicts from escalating into costly legal battles. Consider including provisions for mediation, arbitration, or other alternative dispute resolution methods to resolve issues amicably. The last thing either party wants to do is head down a path that adds costs and slows down your project.
Final Walk/Punch List: The final walk-through is a crucial step before closing to identify any remaining issues or deficiencies. The agreement should state when this will occur and the agreed-upon performance standards for items for the punch list. The punch list details the final tasks or corrections needed to achieve project completion. It serves as a roadmap for addressing any remaining deficiencies before the homeowner takes possession of the property. The agreement should clearly outline the process for creating, reviewing, approving and completing the punch list items.
Insurance: Protecting against potential risks is paramount in construction projects. Verify that the construction agreement includes provisions for insurance coverage, such as general liability insurance and builder's risk insurance, to safeguard against unforeseen events. The agreement should be clear on what insurance is being purchased and by whom. State requirements will dictate some of this, but General liability and Workers Compensation are a minimum and typically covered by the builder. Builder’s Risk which has coverages like home insurance for theft, fire, etc. can be paid for by either party. The same is true for flood insurance if that is required. Make sure the agreement is clear on what is included and who is responsible for it.
Warranty: Sometimes the builder’s warranty is part of the construction agreement and other times it is a separate document. Either way, request it and review it at this step in the process so there aren’t any surprises.
In conclusion, navigating the terms of a custom home construction agreement requires careful attention to detail and clear communication between all parties involved. By addressing key elements such as change orders, closing date, communication, dispute resolution, final walk, punch list, insurance, and warranty, homeowners and builders can lay the foundation for a successful and harmonious construction experience. Investing time and effort in drafting a comprehensive agreement upfront can mitigate risks and ensure a seamless journey towards realizing the dream of a custom-built home. Once you believe you understand the terms and are comfortable moving forward, sign that agreement and let’s get the construction process started.