“I want to start construction on my home. What do I do first?” – A Checklist of Items Any Homeowner Should Consider Before Starting Construction
Over the years, we have seen homeowners, or homeowners-to-be, encounter a number of challenges to the construction of a new home or the renovation of an existing home. By taking some of the steps listed below, homeowners can minimize the risk and most likely avoid some of the pitfalls that cost homeowners much more than what they anticipated when they started construction.
Vetting Your Contractor
Homeowners should not be shy when it comes to researching a prospective contractor. Do not just ask for references. Instead, ask to see a list of the most recently completed, similar projects. You can also ask for the addresses of projects currently under construction, or contact information for previous clients. In addition, there are a variety of public records available online that can help you identify negative information regarding a company or its principals. One of the first things you should confirm is that your contractor is appropriately licensed by the Florida Department of Business and Professional Regulation (https://www.myfloridalicense.com/wl11.asp) or by the local county or municipality (for example, the Pinellas County Construction Licensing Board licenses contractors for a variety of trades, some of which differ from the categories of work licensed by the state https://public.co.pinellas.fl.us/clbsearch/index.jsp).
Next, you can check for complaints against the contractor. If licensed by the state, the DBPR website will include a complaint history for licensed contractors. Whether licensed by the state or by a local authority, you can also check with that local authority for complaints lodged against your contractor. The Better Business Bureau is another resource for this type of information. Further investigation can be done through the clerk of the court website in the county within which the contractor is located. Searching the court records will allow you to see if the contractor or the company’s principals have been involved in litigation. Searching the public records will allow you to see liens or judgment filed by or against the contractor.
When checking the type of license held by your prospective contractor, you want to confirm that their license allows them to perform the type of work involved in your project. The categories of licenses issued by local authorities often differ from the categories of state construction licenses. The types of licenses issued by the state are listed here
http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0400-0499/0489/Sections/0489.105.html, here http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0400-0499/0489/Sections/0489.505.html, and here http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0400-0499/0489/Sections/0489.551.html. A list of the categories of Pinellas County licenses is available here http://www.pcclb.com/pdf/contractor-class.pdf.
A prospective contractor should provide you with a certificate of insurance showing coverages for Commercial General Liability and Worker’s Compensation, and it will be up to you and your contractor to agree to reasonable policy limits. Homeowners should request to be added to the contractor’s policy as an Additional Insured or Additional Named Insured. It is recommended that you contact the insurer or the issuing agent to confirm the policy information contained in the certificate is accurate and up to date.
Make sure you have a written contract. Most of the problems we see and cases we handle involve poor contracts. Many homeowners just obtain an estimate and allow a contractor to start construction. And even if you have a written contract, make sure you carefully review it with your attorney as well as the contractor. The following are just a few areas of particular concern in any residential construction contract:
- The Contract Documents. Your contract typically consists of more than the pages of the contract itself. Construction plans, specifications, schedules of values, construction schedules, or other documents are often incorporated into the contract, and together these documents are referred to as the Contract Documents. A homeowner must be sure that all the plans and specifications, or other terms or conditions upon which the contract sum is based, are specifically identified and enumerated in the contract. For instance, construction plans should be referenced by each individual sheet with the sheet number, title, and date of last revision identified. Similarly, specifications should be listed by the title of each specification section and the date. Never include in the Contract Documents any document that you have not carefully reviewed first. Generally, the contractor’s proposal or estimate should not be included in the Contract Documents, as conflicts often arise between the Contract Documents and contractor’s proposal. Often, the Contract Documents include a written scope of work that describes in detail each major component of the project. If your contract includes a written scope of work, you must review it carefully for conformance with your expectations, particularly in regard to fit and finish. For example, say the contract’s scope of work calls for a “metal roof.” This term covers a wide range of products that may differ dramatically in cost and appearance. A scope of work that simply calls for a metal roof arguably allows a contractor to furnish the least expensive variant. In this example, the scope of work should list the panel manufacturer, the panel profile or model name, the panel color/finish, and the applicable manufacturer’s and installer’s warranties. The scope of work can and should consist of exclusions as well as inclusions where appropriate.
- The Contract Sum. The contract sum should match the final agreed-upon price between the parties, subject to any change orders issued pursuant to conditions of the contract. Construction contracts can express the contract sum in a variety of ways, for example as a lump sum or a cost plus. The homeowner must understand the type of contract sum, as well as what is or is not included in the sum. Temporary utilities, testing fees, inspection fees, and permit fees are examples of items which are just as often the responsibility of the contractor as of the homeowner, and which may not be spelled out in the contract’s scope of work. In a cost-plus contract, the contract must clearly delineate what costs are and are not reimbursable to the contractor.
- Payment Procedures and Lien Waivers from subcontractors and material suppliers. This is one major area where most homeowners neglect to protect themselves from potential liability. This is also one area where general contractors push back the most. They will say, “I will give you a lien release for my work that will cover you.” The problem is a lien release from the contractor will NOT protect you from liability from an unpaid subcontractor or material supplier.
The contract must spell out when and how the contractor will submit requests for payment to the owner. For new home construction or extensive renovations, monthly payment applications, or draws, are often appropriate. For smaller projects, a contractor may request more frequent payment application periods, or a contractor may require a deposit payment, with one or two intermediate payments during construction and the balance due upon completion. Ideally, a homeowner should pay little to nothing up front (though that will not always be possible, especially for smaller contractors or smaller projects). Periodic progress payments calculated based on the work actually completed help to keep the contractor from “getting ahead” of the homeowner.
An important aspect of the payment procedures is the lien release. Florida’s construction lien law exposes homeowner’s to potential liability for paying for work twice if the proper procedure is not followed. Your contract should require the contractor to exchange a partial lien release for the current payment period, and partial lien releases from all subcontractors and material suppliers for the previous payment period, as a condition of receiving each progress payment. The lien releases should mirror in form and content the lien release language provided in Chapter 713, Florida Statutes. A good practice is to include sample partial and final lien releases as exhibits to the contract.
Each lienor (contractor, subcontractor, supplier, etc.) without a direct contract with the homeowner (generally their contract is with the general contractor) is required to furnish the homeowner with a Notice to Owner (NTO) within 45 days of beginning work on the project in order to preserve their lien rights. The NTO alerts the owner to who is performing work on the job, and therefore who the owner needs to obtain lien releases from. It is suggested that your contract with your general contractor include a provision requiring the contractor to obtain NTO from each subcontractor, and their respective sub-subcontractors and suppliers, as a prerequisite to the contractor making the initial payment to each sub. Another suggested contract provision would require the general contractor to furnish the owner with partial lien releases from all subcontractors once the subcontractors have first appeared on the job, even if a subcontractor does not perform work in a particular month. Once a subcontractor begins work, it should furnish a partial lien release every month (or other pay period) until it completes its scope of work and furnishes a final lien release. In the event a subcontractor or supplier does record a lien against the project, the contract should include a provision requiring the contractor to satisfy or bond off the lien, provided that the homeowner is not in default under the contract.
The administrative work to track and review NTOs, partial lien releases, and final lien releases can be time consuming, but it is critical to ensure a homeowner does not end up paying twice for the same work. These tasks can be performed initially by the general contractor, but the paperwork should be reviewed by the homeowner or the homeowner’s attorney or agent prior to each progress payment. This work is often included in your architect’s scope of work if you have retained the architect for “contract administration.” Make sure you and your architect are in agreement regarding the architect’s duties relative to post-design administrative tasks such as jobsite inspections, progress payments, and project close out.
- Other Important Provisions. The contract should define the procedure for the authorization of change orders. This procedure should require the homeowner’s written approval of any change that affects the contract sum or the contract duration and should specify, typically as a percentage of the cost of the added work, the amount of the contractor’s and subcontractors’ overhead and profit which may be included in the value of a change order. If the contract sum includes allowances for particular work, the contract should state whether such allowances include material, labor, or both. When the contractor suggests using an allowance that includes the cost of material, the homeowner would be well served to know what type or grade of material the allowance is based on.
The contract should specify the time for completion by identifying either a completion date or number of days. Particularly if the homeowner knows that he or she will incur certain expenses if construction is not completed within the specified time, consider including a liquidated damages provision which penalizes the contractor by an amount commensurate with those expenses for each day construction remains incomplete following the agreed upon completion date.
A homeowner should carefully review the contract provisions addressing breach and default by both the contractor and the owner. This section of the contract should include notice and cure provisions defining what constitutes a breach by each party, providing for notice to the offending party, and setting a period within which the party can cure the breach and avoid default. Avoid contractor remedies that afford the contractor more than the cost of the work completed on the date of default and reasonable overhead and profit. The remedies available to the homeowner should typically include the ability to stop payments to the contractor and use the remaining contract funds to complete the project by other means. Upon completion, the remaining funds would go the contractor, or, if the cost of completion exceeded the contract sum, the contractor would be liable to the homeowner for the difference between the cost of completion and the contract sum. Whether in this section or elsewhere, the contract should also specify how each party provides notice to the other, including who is to receive the notice, the method of transmission, and the destination of the notice.
The contract should include a dispute resolution section specifying how the parties will resolve disputes they cannot resolve between themselves. This section can provide for any combination of mediation, arbitration, and litigation, and can also include choice of law and venue provisions that dictate which jurisdiction’s law applies and where the dispute can be heard. Be aware of any such provision that identifies anything other than the laws of Florida and venue in the county in which the project is located. The contract should also include a provision awarding attorneys’ fees to the prevailing party in any such dispute.
Though not typically addressed in the contract, homeowners should also be aware of the Notice of Commencement (NOC). The NOC is a simple document recorded before construction begins in the public records of the county where the project is located. Its purpose is to give lienors not in privity with the owner the correct identifying and contact information for the owner, the general contractor, and, if applicable, the owner’s lender so that lienors can provide notices to owner to the proper parties. Many contractors will prepare and record the NOC as a service to the homeowner, but homeowners must be aware that it is their responsibility to ensure an accurate NOC is recorded prior to the start of construction. If a lender is involved, the lender will often prepare the NOC. Unless another date is specified in the document, an NOC is effective for one year from the date of recording.
Project Close Out
Completion of a construction project is generally referred to as two separate and distinct steps. The first, substantial completion, means that the project is able to be occupied and used for its intended use. For a residential project, this typically means that the home has passed its final inspection from the local permitting authority and has been issued a certificate of occupancy. The next and final step is final completion. To achieve final completion, the contractor must have completed all punch-list work; delivered to the owner all instruction manuals, any intended excess materials (often called “attic stock,” this could include small amounts of extra materials such as floor tiles, roof tiles, or pavers to be used as replacements in case of future damage), any as-built drawings prepared for the project, and subcontractor and manufacturer warranty information; and furnished the owner with its final release, all subcontractor final releases, and the contractor’s final payment affidavit. The contract should specify all conditions necessary for the contractor’s receipt of its final payment. Issuance of the contractor’s final payment and retainage should occur once all conditions are satisfied.
Post Construction and Potential Claims
Most residential construction contracts will include a call-back period or an express warranty period during which the contractor is responsible for addressing issues with the construction arising after completion. The default term is often one year following substantial or final completion. Regardless of whether the contract includes such a provision, Florida law recognizes several implied construction warranties, including a warranty of construction per the plans and specifications approved by the building department, warranty of construction in conformance with the building code, warranty of construction in a workmanlike manner, and warranty of habitability. Be aware, however, that these implied warranties can be disclaimed by the contractor if the contract includes a bold and conspicuous waiver of implied warranties.
In the event the homeowner discovers defects in the construction post-construction, there are a variety of claims which may be brought against the contractor, subcontractors or suppliers, or the architect or engineers, depending on the nature of the defect. The most common potential claims include a statutory cause of action for violation of the building code, breach of contract, breach of implied or express warranty, and negligence. Regardless of the nature of the claim, Chapter 558 of the Florida Statutes defines a pre-suit notice and inspection period that must be followed before filing suit on any alleged construction defect. The purpose of the statute is to encourage the resolution of claims without resorting to litigation.
Like most civil claims, the time for bringing a construction defect claim is governed by a statute of limitations. These limitation periods can bar a homeowner from making a claim against a contractor. It is critical that once you identify problems you immediately seek to have them corrected. You should consult with an attorney regarding the statute of limitations that could bar your potential claim.
This article is not intended to be an exhaustive review of the residential construction process. Rather, it is meant to highlight some of considerations prudent homeowners should make before, during, and after a single-family construction project. Thorough research prior to selecting a contractor, careful review of the construction contract, and careful attention to detail—particularly in regard to payment and change order procedures—can help any homeowner avoid the majority of issues our firm’s construction law attorneys regularly see. Our firm also assists homeowners in the drafting and negotiation of construction contracts and in helping resolve disputes during, and after, construction of your home.
Charles A. Samarkos is a partner at Johnson, Pope, Bokor, Ruppel and Burns and is a Board Certified Civil Trial Attorney who handles litigation involving construction defects. Eric Brooks is an associate at Johnson, Pope, Bokor, Ruppel and Burns and a LEED Accredited Professional specializing in construction law.