Real estate contracts are tricky to navigate because of the intangibility of several elements: accountability of actual materials used, labor contracts, measurement of completed work, wastages, and other specifications. When drafting real estate contracts, there will be several questions to ask the builder before signing the contract. As an owner, some things to consider before signing a building contract are
Scope of Work
This is the most critical provision in the contract because it defines what both parties should expect from the contract. But, this is also the most easily misdrafted contract because it is difficult to understand what aspects of the contract to agree on during the construction. At the outset, both parties have no more than an idea of what the final deliverable will look like after the construction. Therefore, the actual scope of the work has to balance generic terms and specificities of what the owner wants to accomplish.
This section typically includes the permits, getting the plans approved, drafting blueprints, and other activities that precede and include construction activities. This section also identifies and makes the contractor conform to the original plans and drawings. Since the idea of the entire contract is vague, it is easy to put in conflicting terms in the contract. It is also easy to slip into the idea that many terms would be implied and can work on a goodwill basis. However, later in the construction, those terms might not become enforceable because they were not put down in words.
It becomes imperative to peruse this section carefully and draft it to adhere to your requirements.
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Timeline of Deliverables
This section would outline what the deliverables schedule and timeline will be throughout the contract. Drafting this section carefully is important because it is not uncommon for a project to stretch past its due date infinitely. When that happens, no one can be held liable for the delay because the contract does not specify what happens during such delays. Having this clause in your contract ensures that you can pin down any party’s accountability for any delays caused to the construction process.
If the contractor has caused the delay, then the clause can stipulate that the contractor will be liable for a fine for each day or week of delay caused. If the delay, instead, is because of the client, then the clause can stipulate that the damages caused or profit unrecovered would be charged to the customer. Either way, when both parties decide to include this clause, an important part is to include provisions for liquidated damages and how such damages would be calculated.
It is also essential to include force majeure clauses because it doesn’t make sense to penalize either party for delays caused beyond their control. At the outset, both parties should clearly mention what triggers the force majeure clause and how such a clause would be defined.
Payment and Schedules
This is the second most important clause in any real estate contract. This clause identifies the money payable to the contractor after the task. But construction contracts are incredibly tricky and tough to navigate. In most cases, the contractor relies on the customer’s money to fund the process. That is why the contract is usually split into multiple parts. The payment is divided so that a portion of it would be paid at the end of a cycle.
In one cycle, both the contractor and the client would identify the completed work and release the payment for that part of the project. However, the method of identifying how much work has been completed is an important consideration to make. The parties to the contract should specify that method clearly, including the names of any professionals who would be brought in to confirm such completion.
This clause includes not only the payment for the process but also any incidental charges that might arise during the construction. The liability of payment of such charges should also be clearly defined in the contract. These charges can be payments for any taxes, fees, or any other expenses incurred from time to time. If the liability of payment is on the contractor, then such payments are reimbursed, or are part of the complete payment should also be mentioned in the contract.
In addition to that, another important segment is the escalation clause. What this clause says is what happens to the construction process in case the costs increase. What costs come under the purview of the escalation clause should also be mentioned clearly. In case the costs do escalate, whether the client will increase the payment for those clauses is also an important consideration. If an escalation clause is included, the basis on which such an escalation will be calculated should also be mentioned.
The most important of the miscellaneous clauses is the mechanic’s lien. Basically, the client waives the responsibility of payment of dues to any sub-contractors as part of the process. These costs could be considered on a reimbursement basis or included as part of the entire project fee. Either way, the lien has to be mentioned in the agreement
The method of changing the scope and any warranties included in the contract should be clearly mentioned. The dispute resolution clause is an integral part of the contract. What would happen in case of any disputes and how such disputes would be resolved is a vital part of every real estate transaction.
Just because you have a contract does not mean the contractor is required to adhere to the contract. The best you can do is to draft an ironclad agreement.