It’s the heart of the matter. The controlling document if things go wrong. The most important document in your relationship with your homebuilder
Nature of the Construction Contract
A construction contract is not a real estate transaction. It is a personal service contract between the homebuilder and the homeowner for services to be rendered.
This creates interesting differences between the normal real estate contract that many homeowners are aware of and the construction contract.
• Construction contracts are not recorded like a real estate transaction
• As a non-recorded contract, the actual amount of the construction contract is private and not recorded in any county record.
• As there is no record of the value of the contract (custom home), the value is not available for appraisal purposes. This can create an issue as many custom homes are more valuable than a new tract built home, and appraisers can only locate new homes that are real estate transactions (builder financed) for valuation purposes.
• A savvy custom homebuilder will have recent transactions that they can provide the appraiser with for valuation purposes. Failure to provide such information may result in a low appraisal and project failure.
• Construction contracts will have a pre-determined length of time
• Typical construction contracts will range from 9 months to 2 years, depending on complexity and the homebuilder’s schedule.
• The timing for the construction contract will typically start at the issuance of the building permits.
• If water availability (well) and septic engineering must be completed prior to submitting a building permit, this can add significant delays to the start of the project.
• If there is a delay due to pre-permitting requirements, the construction loan will start to run at the signing of the loan documents. This can create a situation where the homebuilder is within their contractual time limits, but the loan expires prior to completion and the homeowner is forced to renegotiate the loan. This will add extra expense to the homeowner. A good practice is to ensure that the construction loan is for 1 year, if the construction contract is for 9 months.
Components to a Construction Contract
Although every construction contract is as different as the homebuilders creating them, most contracts will have the following items.
• Recitals: who the parties are, addresses and intent of the contract
• Contract Price: the actual amount of the contract which should include the taxable amount (taxable amounts are often broken-out for the client to understand how much tax is paid)
• Homebuilder Services: a recital that includes the complete construction of the home and what is included and what is excluded
• Homeowner Responsibilities: a recital that includes the responsibility for the homeowner to make timely payments to the homebuilder if the lender fails in their responsibilities
• This clause can be an issue if the lender is not timely in their inspection and payment systems.
• Typically, the homebuilder will submit a draw sheet for the prior month’s work completed to the homeowner for approval and then submit the signed draw request to the lender. The lender will then order an inspection and once completed, will finalize the amount requested and approved for payment to the homebuilder.
• The homebuilder will typically submit the draw sheet at the end of the month and will make all payments to their subcontractors/vendors by the following 10th of the month.
• If the lender is not timely in paying the homebuilder, most construction contracts will require the homeowner to make the draw payment after X number of days to the homebuilder. The homebuilder is not in contract with the lender but is at the lender’s mercy for prompt payment.
• Allowances: the construction contract should state the key allowance categories and those amounts
• Homebuilder Disclaimers: include items that if they occur, the homebuilder is not responsible for. Common disclaimers are excavation of rock, or if water is encountered, strikes, “acts of god”, weather related issues, and material shortages.
• Warranty Section: how the homebuilder warranty works and how the product and installation warranties work.
• Boilerplate: the legal components that make the contract viable, selects jurisdiction, mediation requirements, etc.
A good construction contract is designed to define, explain, and mitigate issues that may arise during the course of construction. In case of either party’s failure, the contract provides a legal framework on the resolution of those issues.
Ask for More Information
Sullivan Homes PNW believes the more information our custom homeowners have, the better their decisions will be. Contact us for a video conference call. Any questions and all the answers. We love to talk construction!
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