October 1, 2020

10 items homeowners need to look for in residential construction contracts

Millstein

(Editor's note: This is the first of a two-part series on residential construction contracts. Part two will run Oct. 8.)

Drafting a contract is never fun. Reviewing one is often even less entertaining. So what happens when a homeowner is considering a significant remodel or building a spec home on a vacant lot? Typically, the relationship between the owner and the contractor is key. But these relationships can and do break down, especially in stressful times when various dates (commencement and completion) are often in a state of flux.

Below are the first five of 10 items every residential homeowner should look at in the contract with their contractor. The list is not in any particular order.

1. ADDITIONAL INSURED

• What is this? By contract, you can have your contractor include you, the owner, as an additional insured (AI) on their insurance policy. If this occurs, you should get a certificate showing you are an AI and make sure your contractor follows through with any other requirements that its carrier may require for you to be an AI.

• Why is this important? If your contractor's work causes another party (such as a neighbor) to sue you, you can then turn around to your contractor's insurance, as an AI, and seek defense and indemnity from your contractor's insurance carrier.

• Takeaway. If, for example, your contractor cuts down a neighbor's tree by accident, and if you are sued (or a claim is made) by the neighbor, your contractor's policy should kick in. This is not a substitute for “builder's risk” or other policies that may protect against issues such as fires, and AI coverage only kicks in if another party sues you and the claim relates to your builder's work. If you believe your contractor's work is shoddy or insufficient, this will not protect you, since it only involves a different party suing you related to your contractor's work.

2. WARRANTY PROVISIONS

• What is this? Generally speaking, a warranty relates to what happens when the work proves to be less than perfect and the owner requests a repair. It can be a confusing issue (see No. 3 below), but in general, an owner will want to tie the contractor's work to a specific performance threshold. Some of this depends on how specific the work is. If, for example, it is for painting only, the Painting and Decorating Contractors of America has specific guidelines that the painter's work should meet or exceed. If the work is more general (i.e. a remodel), the owner should require that it meets or exceeds one of several standards.

• Why is this important? Most consumers (and contractors) think there is an automatic one-year warranty on a contractor's work in Washington. This is false in the remodel context. Having a strong warranty is a great way to avoid litigation. It typically demands that the workmanship issues are addressed at no charge by the contractor, and can hopefully allow everyone involved to perform as promised.

• Takeaway. Without a specific warranty provision that outlines what the standard is and contractor promises to meet or exceed, homeowners can easily be left in the lurch.

3. SUIT LIMITATION PROVISIONS

• What is this? In Washington the “rule” regarding filing suit is simple for a written contract: The suit must be started within six years from the date of substantial completion or termination, whichever is later. There is no requirement that the contract be a written contract in Washington. Typically it is. If it is verbal or oral, the limitation period is only three years. Most contractors will try to reduce the window for suits to one or two years. Note that this is different than warranty provisions, since an underlying breach of the contract may go beyond warranty issues, so this area can get confusing, quickly, for both contractors and owners.

• Why is this important? Assume the owner receives a draft of the contract from the contractor that says, “all suits arising out of this agreement must be filed within one year.” Typically, courts will enforce this one-year limitation. One year may or may not be enough time to figure out whether the work is sufficient. Some defects are latent rather than patently obvious, meaning some may take some time to surface. It is also important to examine and define trigger dates for when this one-year period starts and if it can restart if the contractor performs repairs in the interim.

• Takeaway. First, this is a clause that can make or break your ability to recover if something goes wrong. It should be reviewed carefully. If there is no “suit limitation” clause, then the outer window for suing under a breach of contract theory is likely six years.

4. MILESTONES

• What is this? When is the contractor going to start, when is the contractor going to complete, and — if the work is larger in scope — when is the contractor going to finish, for example, the earthwork or siding?

• Why is this important? As we all know, deadlines slip, especially in challenging times. This can help everyone stay on the same page.

• Takeaway. It's advisable to have targets for key milestones. Most contractors will be wary of promising start and stop dates though, in this environment. Typically, this is not necessarily a bad sign. But, if there are dates the owner needs to meet and the contractor realizes it cannot meet those dates, the contract should state that the contractor must advise the owner, in writing, why the date is not possible, what the makeup date will be, etc.

5. RETENTION

• What is this? This is an amount the owner can retain or hold back from payment. For example, the parties may agree that, until the project is completed, the owner will retain 5% from every payment.

• Why is this important? This can allow the owner to make sure that the final work is completed correctly.

• Takeaway. On most private remodel projects, this can be a very touchy subject for contractors, since contractors are typically not interested in allowing for the owner to withhold retainage. Contractors may think the owner will use retention as a means of finding excuses in an effort not to pay the full final amount. But, this right appears on the lien form (covered in next week's Spotlight column) that you should be provided prior to commencement of construction, and it is therefore an option via statute.

Seth Millstein has been practicing construction law in Seattle since 2004 and is a member of the Washington State Bar Association's Construction Counsel. Millstein founded Pillar Law in 2010, where he and Kerry Lawrence represent owners, contractors, suppliers and trades in construction matters.

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