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Building or remodeling a home is a
large financial and emotional undertaking whether you are
building your dream home or rebuilding your home after the
devastating San Diego fires. Everyone has heard horror stories
of homeowners being taken advantage of by unscrupulous or
inexperienced contractors. The process is complicated and
even if you hire a reputable contractor there can be delays,
cost overruns and litigation. After years of representing
homeowners, contractors and material suppliers, McCullogh
and Associates knows that it is better to prevent future
problems then to allow problems to develop resulting in costly
litigation, a delayed construction project and cost overruns.
Problems can be avoided by thoroughly investigating potential
contractors, careful drafting and review of written contracts
and using sound oversight procedures during construction.
McCullogh
and Associates recommends that any homeowner taking on the
challenge of building, rebuilding or remodeling their home
consult
with an experienced attorney. What follows is a general overview
of what a homeowner should do when building, rebuilding or
remodeling their home.
Hiring an Architect or Designer
A homeowner should use the
same due diligence in hiring an architect or designer that
he does in hiring a contractor.
- Only Hire Licensed Architects
or Experienced Designers. A designer may legally prepare
drawings and plans for single family dwellings
of wood frame construction not more than two stories
and basement in height. If your project falls within
the definition
of Business and Profession Code Section 5537 and you
may use an architect or a designer. Whether you select
an architect
or designer is based upon your own personal preference.
A designer is almost always less expensive than an
architect.
A homeowner may verify that a person is a licensed
architect by performing a licensee search at the California
Architects Board Website
at www.cab.ca.gov. This database lists all currently
licensed individuals. Unlicensed individuals or architects
whose licenses are delinquent, expired, suspended or
revoked are
not listed in the database.
- Research the Qualifications
and Experience of Your Architect or Designer. If you
plan to hire a licensed architect, verify the
architect’s
licensing status at the California Architects Board
website (www.cab.ca.gov). Obtain references from the
architect or
designer and contact at least five references. It
may be helpful to view the architect or designer’s
prior projects. Research whether the architect or designer
has been a party
to current or prior litigation. Most California Superior
Courts allow you to perform searches by party name
of past and current lawsuits. The Superior Court of
California,
County
of San Diego website (www.sdcourt.ca.gov) has a Court
Index Inquiry. Search by the architect or designer’s
firm name and individual name. Just because an architect
or designer
has been a party to a lawsuit does not mean that
they are not qualified. If the architect or designer
has been
a party
to a lawsuit, discuss your findings with the architect
or designer and if the lawsuit involves a homeowner
complaint, contact the homeowner.
- Sign a Written Contract
Before the Architect or Designer Commences Work.
Licensed architects are required to have a written
contract
setting forth a description of services to be provided
by the architect to the client, a description of
any basis of
compensation applicable to the contract and method
of payment, the name, address, and license number
of the architect and
the client, a description of the procedure that
the architect and client will use to accommodate additional
services and
a description of the procedure to be used by either
party to terminate the contract. California Business
and Professions
Code Section 5536.22.
Whether using an architect
or designer, the written contract should include the
following:
- Name and address of architect/designer
and if a licensed architect, the license number;
- Detailed
scope of work. The design
process is generally divided into four
phases, the
schematic design
phase, design development phase, construction
drawings phase and construction administration
phase. When
interviewing and receiving bids from architects
and designers make sure
that the architect or designer provides
you with the total cost to complete all phases
that will
result in
complete
construction drawings. Construction
drawings are needed to obtain building permits and
it is
the construction
drawings
that are used to obtain bids from contractors.
Many
homeowners are given a quote through
the design development
phase and
assume that the floor plans, elevations
and preliminary plans prepared at this stage
are in fact
construction
drawings.
They are shocked when the are told
that the previously quoted contract price does not
include
construction
drawings and
that construction drawings will be
a separate and often sizeable charge.
An
architect and designer
may also offer
his or
her services for construction administration.
This is not required, but may be desired.
If you retain
an architect
or designer to perform construction
administration make sure you have a written
contract setting
forth the scope of construction
administrative services and how the
architect will charge for those services.
Construction
administrative
services
can be charged based upon a percentage
of the overall cost of construction or
on an hourly
basis.
- The contract should include
an estimated cost for actual construction
to ensure that the
plans prepared
by the architect
or designer can be built within the
homeowner’s
budget. It is not uncommon for the
homeowner to get caught
up in designing the home
and request numerous changes and
upgrades that the homeowner cannot afford. It
is important to clearly
communicate and
put in writing that the architect
or designer will be preparing plans that
can be built within
a specified
budget.
- The
contract should set out the time
to complete each phase of the design process
and set forth
a liquidated
damages
provision
if the deadlines are not met.
- The
contract should include an attorneys’ fee provision
that provides that if either party files a lawsuit
to enforce
the terms of the
contract, the
prevailing party is entitled to recover reasonable
attorneys’ fees
and costs.
Bidding the Construction Project
To
obtain the best price, the homeowner should obtain at
least three (3) bids from qualified contractors. Contractors
submit a bid based upon a review
of the construction drawings. It
is
recommended that the homeowner also prepare a separate
document entitled, “Instructions
to Bidders” outlining
any special requirements the contractor
should follow when submitting its bid.
The Instructions
to Bidders should address the format
a contractor must
use when submitting its response
to the bid. If all contractors use a
similar
format
it makes it easier
to compare bids.
For example, unless
your construction plans are extremely
detailed, contractors cannot give
set prices for finish items such
as appliances, lighting and plumbing
fixtures, flooring and cabinets.
Instead
of giving
a fixed price
for these items
an amount of money is assigned to
a specific category which is referred
to as an “allowance.” If
the actual amount spent for that
item, for example cabinets, is
less than the allowance,
the homeowner
receives
the difference.
If the
actual amount spent for that item
is more than the allowance, the homeowner
must pay
the extra amount plus the agreed
upon contractor profit and overhead.
When comparing contracts or
bids, it
is important
to look beyond
the total contract
amount
and compare allowance items. One
bid may be substantially lower than
the other, but that it may be because
the allowance items
are unreasonably
low.
In reality
the actual amount paid by the homeowner
will
be substantially more because the
homeowner is responsible to pay costs
that exceed the
allowance amount.
Categories which
are not allowance items are fixed
price. This means that if the contractor spends
less than
the fixed
price amount, he keeps the difference.
However, if the actual
cost is more
that the fixed
price amount, the contractor
is responsible to pay the overage.
If the homeowner has determined that
he wants specific finish
items like types of appliances,
lighting fixtures,
cabinets these can be called out
specifically in the Instructions
to Bidders and the
contractor can submit a fixed price
bid for these items.
A homeowner should
request that the contractor’s bid include a schedule
of values. A schedule of values is a breakdown of the total
construction contract amount broken into categories such as framing,
grading, foundation,
rough
plumbing, rough electrical, drywall, roof,
finish electrical, appliances, contractor profit and overhead,
etc. The schedule of values
should be part of the bid
submittal to allow the homeowner
to compare contractor’s
bids.
As part of the bid process,
a homeowner should also require that a contractor submit proof
of insurance. A general contractor
should
have, at a minimum, a commercial
general liability policy with
limits of
coverage of $1,000,000.00
or more. If the contractor has employees,
the contractor should also
have a
workers compensation policy with
coverage of $1,000,000.00 per occurrence.
Hiring a Contractor
- Only Hire Licensed Contractors.
A homeowner should only hire a licensed general contractor.
A contractor’s license
status may be verified by a
search on the California Contractors
State License Board’s
website (www.cslb.ca.gov).
You may search by contractor
license number,
contractor name or personnel
name. The Contractors State
License Board website
will indicate if the contractor
is licensed, the type of
license, whether
the license is active, whether
the
contractor has prior disciplinary
action against it and identify
the contractor’s
license bond surety and workers
compensation carrier and if
the contractor is
required to have workers compensation
insurance.
- Investigate Potential
Contractors The homeowner
should thoroughly investigate
potential contractors, preferably
before the bid process. This
includes verifying
the contractor’s license status,
obtaining and contacting
references and determining
if the contractor
has been involved in past
or present litigation.
It is
also advisable to view
the contractor’s
prior projects. Most California
County Court websites allow
you to perform searches
of past and
current lawsuits
by party
name. The Superior Court
of California,
County of San Diego website
(www.sdcourt.ca.gov) has
a Court Index
Inquiry.
- Obtain At Least Three
(3) Bids From Licensed
Contractors. It is best to select your contractor
after you have reviewed
numerous bids and
performed your investigation.
A decision made after
a review
of the bids
and an investigation
of contractors is an informed
decision. It is much more
difficult to negotiate
price or deal with
background
issues if the
homeowner and contractor
already
have a written contract.
- Sign
A Written Contract Before Work Commences. A contract
governs the
relationship between homeowner and contractor and how the contractor will charge
the homeowner for work
performed. A homeowner is in a better
bargaining position if
the contract terms
are decided before
work commences.
After work commences
it becomes much more
difficult to
negotiate price , define
the scope of work and
terminate an uncooperative
contractor.
- The Written
Construction Contract Should Contain Key Provisions.
A licensed contractor is required
to enter into a written contract.
The California
Business and Professions
Code
sets
forth specific requirements
for items that must
be included in a construction
contract. This is the
obligation of a contractor.
For the homeowner’s
protection, the following
items should be included
(these items
may be duplicative
of the requirements
of
the Business and
Professions
Code):
- Contractor’s
name, address
and license number;
- Detailed
scope of work.
( It is best if a schedule
of
values is attached
to the contract
and made an exhibit.);
- A
fixed price
to complete
construction.
- Time
to complete construction and
a liquidated
damages
provision for each
day construction
is not completed after
deadline.
The time to complete construction
should
include both a
start date
and a total
number of days to complete
the project.
- A
procedure for change orders. The
contract
should require that all changes to
the scope
of work, cost
of construction
and time
to complete
must
be in writing signed
by the homeowner and contractor.
- 10%
Retention.
The
contract
should require that
10% of all payments to the
contractor
be withheld until the project is
complete.
This
is
often referred to as a “retention.”
- Attorneys’ Fee
Provision The contract should contain an attorneys’ fee
provision that
provides that if any party files a lawsuit to enforce the terms of the
construction contract that the
prevailing party
is awarded
reasonable
attorneys
fees and
costs.
- Fund Control Plan. The contract
should have a detailed procedure for submitting
pay requests and making payments under the construction contract.
Fund
controls
are discussed in more detail below.
- Provision for Termination
for Convenience by Owner. This provision allows
a homeowner
to legally discharge a contract or without cause. Without such a provision
a homeowner may find it difficult
and legally
risky
to
discharge
a problem
contractor.
- Homeowner Should
Be Listed As Additional Insured on Contractor’s Insurance
Policies. The contract should require that the homeowner
be added as an additional
named insured on contractor’s
commercial general liability and workers
compensation policies (if applicable). As stated earlier,
at the bid phase the homeowner
should request that all contractors produce proof of
insurance.
Once the contractor is selected and the
contract is signed it is
not enough
that a contractor
represents that the homeowner
has been added as an additional named insured.
The
homeowner should request that
contractor provide
the homeowner
with
written verification, usually
in the form of an Accord Form, listing homeowner as an additional
named insured.
The homeowner should have an experienced attorney review the
written construction contact
prior to signing. An experienced
attorney can help the homeowner spot
problems and ensure that the homeowner’s
interests are protected before a problem arises. It is
much
less expensive
to pay an attorney
to review and revise a construction contract
than to hire an attorney to rectify a problem
that occurs once construction begins.
Fund Control
A fund control is a procedure
to make sure that before a contractor is paid
for monthly progress payments that the work billed
for has been
completed
and that
the contractor uses the money it receives for the project
to pay the
subcontractors
and material suppliers for that
project. The homeowner
can manage
the fund control or the homeowner
may hire a company specializing in
fund control. All fund control companies are required
to be licensed
by
the State of California.
Many banks and lenders
require its borrowers to use a fund control
with a pre-established fund control procedure.
However, insurance
companies do
not often require a
fund control procedure or the use of a fund control
company. Insurance
companies will issue a check to its insured. It is the
insured/homeowner
who
is responsible for making
payments to the contractor and ensuring that
the contractor
properly applies funds and performs the work for
which it bills. It is not uncommon
for contractors
to front load their monthly pay requests (that
is to bill for work
not completed) or not pay subcontractors and material
suppliers.
Contractors usually submit monthly bills.
These are called monthly progress
payment requests. Like the name suggests, the contractor
bills for the “progress” it
has made to date on the construction project. The issue
is how
does a homeowner verify the contractor’s
progress. This can be very difficult,
especially for an inexperienced
homeowner.
If a contractor submits a monthly
progress payment request indicating
that
the project is 25% complete, how can a homeowner
know if
this is
correct? The
best tool to track contractor billing
is a schedule of values. This schedule
of values
is a breakdown of the total construction
contract
amount broken down
in to categories such as framing, grading,
foundation,
rough
plumbing, rough electrical, drywall,
roof,
finish
electrical,
appliances, contractor
profit and overhead,
etc. The schedule of values is prepared
by the contractor and
it should be submitted at the
time the contractor
bids the project. The schedule
of values should also be made part
of the construction
contact.
When the contractor submits its
monthly progress payment request the
request
should
be accompanied by a revised
schedule of values.
Each schedule of values should indicate
the total
amount
billed to each
category
and the percentage of completion
plus the amount billed for that monthly
progress billing request
and revised percentage of
completion. It is easier to
determine if framing
is 25% complete than it is to determine
if the
entire project
is 10% complete.
Using a fund control
and fund control procedure
is the
best method to ensure
that a contractor is paying project
subcontractors
and
material suppliers.
A good
fund control
procedure requires that a contractor
obtain signed lien releases
from subcontractors and material suppliers
as a condition of receiving
monthly progress
payments.
If a contractor does not pay
its subcontractors and material suppliers the unpaid subcontractors
and material suppliers may record mechanic’s
liens against the homeowner’s
property. The homeowner is legally
responsible
to
pay the subcontractors and material
suppliers (assuming they have
complied with the procedural requirements
and
have
a valid claim) even if the
homeowner previously paid the contractor
for the services
or materials which are the
subject of the mechanic’s
lien.
Using joint checks or direct
payments to subcontractors and material
suppliers is
another method to ensure subcontractors
and material suppliers
are paid. However, a signed lien
release should
be obtained from the material
supplier or
subcontractor before a direct or joint
check
is issued.
DO NOT PAY THE CONTRACTOR IN ADVANCE
FOR WORK NOT PERFORMED.
Not only is it unwise to pay
a contractor for
work not performed, including deposits,
it is a violation
of California contracting law
to pay a contractor a large down
payment. California Business and
Professions Code Section
7151.2(3) limits the amount a contractor
may charge for a
down payment. The down payment
may not
exceed one thousand dollars ($1,000.00)
or 10% of the contract
amount, whichever is less.
(California Business
and Professions Code
Section 7151.2(3)).
The written construction
contract and fund control agreement
should require that 10%
of all monthly
progress payments are
withheld as a retention.
The retention is then
paid to the contractor upon final
completion of the project. The retention
is a
safeguard for the homeowner. If there
is a problem with the
project the
homeowner may use the withheld retention
funds to fix any problems or
complete unfinished work.
Notice of
Completion
Once the project is complete the
homeowner should record a Notice of
Completion.
The Notice of Completion is recorded
with the
recorder’s
office for
the county where
the property
is located.
The time
limit for
recording mechanic’s
liens is
triggered by
recording a Notice
of Completion.
Subcontractors and
material suppliers
must record
their mechanic’s
liens within
thirty (30)
days after
recordation of
a Notice of
Completion or
Notice of
Cessation. If
no Notice
of Completion
is recorded,
a subcontractor or
material supplier
has ninety
(90) days
after completion
of the work
of improvement
to record
a mechanic’s
lien. (California
Civil Code
Section 3116.)
The original
contractor has
sixty (60)
days after
recordation of
a Notice of
Completion or
Notice of
Cessation to
record its
mechanic’s
lien. If
no Mechanic’s
Lien or
Notice of
Cessation is
recorded, the
original contractor
has ninety
(90) days
after the completion
of the
work of
improvement to
record its
mechanic’s
lien. (California
Civil Code
Section 3115).
Problems
During
Design and Construction
During
the design and construction phases
numerous problems can and most
likely will
arise. Some
of these
problems may
resolve informally
between the
homeowner and
the architect/designer
or
the homeowner
and the contractor.
Informal resolution
is more
likely if
the homeowner
has entered
into a detailed
written contract
that governs
the relationship
between the
parties, if
problems are
caught early
and the
parties openly
discuss issues
and problems.
For situations
in which informal resolution
is not possible it
is very
important for
the homeowner to
get competent
legal advise
as soon
as possible.
Problems that
are ignored
or put off
can result
in increased design
or construction
costs, abandonment
of the
project by
the contractor,
a depletion of
the homeowner’s
funds and
delay in
construction.
It is
also important that
the homeowner document all
communications
with the
architect/designer
or
contractor in
writing. This
has become
much easier
with the
widespread use
of email.
All communication
should be
saved for
future reference.
Conclusion
Thorough
investigation, knowledge
of the construction
process and a good
written contract
are key elements
of a
successful construction
project. This
article provides
the basic
framework to
ensure a successful
construction project.
When problems
arise an
experienced construction
law attorney
can help
put the construction
project on
track.
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