Angie's LIST Guide to
Signing a Contract
What is a contract?
People signs contracts left and right, often without even reading them. Every time you sign a credit card receipt, or check a box agreeing to the terms of service on a website, you are legally binding your name to a contract.
Contracts can be lengthy, especially when it's a major remodeling job run by a general contractor, and they’re written in legal jargon that is difficult to understand. In most cases, the contract was crafted by a lawyer whose job was to protect the company or person named in the contract, yet most people are quick to sign a contract without even reading it.
In a March 2011 nationwide consumer survey, Angie’s List found that 16 percent of the respondents don’t fully read contracts before they sign them.
Types of contracts
A contract is simply an agreement between two parties that promises an action. Technically speaking, a verbal agreement or handshake could be considered a contract, but when your home and thousands of dollars are on the line, you need to have an actual, written contract with the general contractor managing the project.
When it comes to home renovation and repair, the two most popular types of contracts are fixed-price and time and materials.
Fixed-price vs. time and materials contract
A fixed-price contract is the most common type of home remodeling contract, and it’s the type of contract you should demand from any general contractor. A fixed-price contract spells out exactly how much a project will cost including all permits, building materials and labor. This type of contract locks the overall cost into place, preventing the general contractor from raising the price once all parties sign off. A fixed-price contract also shows that the general contractor understands the scope of the project, and is willing to legally attach his or her name to the job. It can benefit the homeowner because the general contractor will have to pay for any price increases, or additional times it takes to complete the project. A fixed-price contract essentially gives the contractor more incentive to finish the job on schedule because the contractor will pay for any additional costs out of pocket.
A time and materials contract bills the homeowner by the hour for the labor and materials involved in a remodeling project. Some homeowners incorrectly assume this is the best type of contract because they think it will save them time and money, but in reality, it’s like handing the general contractor a blank check. A time and materials contract is subject to change so any additional costs that arise during the project will be paid for by the homeowner. It could also prolong the project because the contractor has less incentive to finish in a timely manner.
A general contractor might recommend a time and materials contract if there are unforeseen variables that could seriously prevent the contractor from accurately pricing the job. If this happens, you should first contact other contractors to see if you can get a fixed-price contract. If you do agree to a time and materials contract, you should make sure to ask for weekly reports on pricing and the number of hours worked.
The key to having a successful project is to have a well-developed contract that doesn’t leave anything out. Everything from the types of materials used to the cleanup of the construction site should be included in the contract. If something goes wrong during any phase of the project, both you and the general contractor should be able to rely on the terms actually specified in the contract.
Make sure your remodeling contract includes the following:
Contact information: The contract needs to include the name of the contractor, address, phone number and license number.
Job description: Spell out the project down to the very last detail and designate who is responsible for what. Don’t automatically assume the contractor understands all of your wishes and desires.
Set a timeline: Set a timeline detailing exactly how long the project will take, including start and end dates. A general contractor should be able to give you a time estimate, and it will be used to determine the contractor’s quote.
Payment terms: Tie payment dates to job completion. Most contractors will ask for a down payment, usually between 20 and 30 percent of the total cost. You should watch out for a contractor who asks for a full payment before starting a job. It’s also a good idea to hold back at least 10 percent of the payment until the job is completed to your satisfaction.
Local authorization: Specify that your contractor is responsible for securing necessary regulatory permits for your project – walk away from a contractor who can’t or won’t approach local licensing or permitting agencies.
Penalties for missed deadlines: Give yourself options to deduct or delay payment if completion dates are missed. Be specific about amounts and clearly define terms.
Set a procedure for changes or additions: Outline a process to follow for project changes or additions. For example, require written sign-off on changes sought by the contractor so you don’t have to accept unauthorized changes. Large-scale projects supervised by a general contractor often uncover hidden problems that must be addressed before work can continue.
Detailed outline of costs and materials: Contractors should provide this in their estimates, but attach the details to your contract. Require an itemized list of materials, labor and any other costs you will incur. If you want the contractor to use a specific brand, it needs to be included in the contract, and you should ask to see receipts.
Proof of licensure, insurance and bonding: Find out what, if any, trade licenses your community requires and don’t hire anyone who fails to meet them. If something goes wrong you may be forfeiting state or local enforcement assistance if you hire someone who isn’t licensed. Ask for proof that a contractor is licensed, bonded and insured to protect you from liability for property or job-related injuries.
Termination clause: Spell out reasons the homeowner or contractor can leave the job without penalty (e.g. if the homeowner doesn’t pay him or her or if the job drags on without reasonable explanation for delay, poor quality work or failure to adequately communicate.)
Other protection: Ask the contractor to provide a lien release, which protects you from liability should the contractor fail to pay his or her subcontractors who worked on your project.
Before signing a contract
Remember, the contract is your best defense in the event that something goes wrong while you are working with your contractor. It’s your job to read the entire contract and to address anything that seems out of place. You are legally binding yourself to the contract, so you need to be sure it represents your best interest.
Don't assume everything is included: Every aspect of the project needs to be covered in the contract. Make a list of all of your concerns relating to the job and make sure they are addressed.
Payment expectations: The average down payment should be between 20 and 30 percent of the total cost of the job. Never pay for a project with cash, and always pay with a credit card so you have recourse in case something goes wrong. You should be wary of any contractor who demands full payment before the job has begun. It’s also smart to tuck some extra money away to account for unexpected problems. Even the most carefully planned project can change, especially if hidden problems are found. A good amount to set aside is 20 percent of the total project cost.
Establish a “punch list.” Basically, this is how the general contractor will deal with small fixes that may remain after the bulk of the work is completed. A good rule of thumb is to determine the cost of those items, double it and then withhold that amount from the final payment until the punch list is complete.
Review all sections of the contract before you sign. It’s your responsibility to read and understand the contract and to make any concerns known before all parties sign off. Keep an eye out for any blank spaces on the contract that could potentially be altered later. If that space is not applicable, cross it out or write “not applicable.” You also want to check if your contract includes a lien waiver, which covers payments to all subcontractors who work on the project.