After the destruction and devastation of Hurricane Ian in Southwest Florida, both property owners and contractors will be scrambling to rebuild the homes and businesses that were destroyed. To get the project moving forward, both parties should require a written construction contract that will set forth the rights and responsibilities, including the price, scope of work, and timeline that the project will be completed in. Here is an overview of what should be addressed in the construction contract, whether the project is residential or commercial, and whether you are an owner or contractor:
· Project Scope- Before the owner and contractor can begin to contemplate the price of the work, or how it will be billed, both parties need to understand what the project’s scope will be. The more developed the plans, specifications and drawings are, the less likely there is to be a disagreement later as to what was included in the price, what work the contractor was supposed to perform, and how long the project should have taken to complete. In nearly all instances, the best practice is to make the project’s plans, specifications and drawings an exhibit to your construction contract.
· Types of Contracts- While there are many different types of construction contracts, the three most common contracts are (1) lump sum, (2) cost plus without a guaranteed maximum price (“GMP”), and (3) cost plus with a GMP.
o Lump sum contracts- Lump sum contracts are the most common arrangement when you think of a contract: the owner and contractor agree on a set price for a specific scope of work. For a lump sum contract, you will generally need a well-developed scope of work. With this type of contract, the contractor bears the risk of material price increases, labor shortages, and ill-developed plans, so they will want to account for those uncertainties in the bid. Traditionally, lump sum contract projects are the quickest to complete.
o Cost plus without a GMP- Under this type of contract, the owner and contractor agree on the contractor’s fee up front. This number can range anywhere from 15% to 30% of the costs of the project. Costs normally include all subcontracts, direct material and supervision costs, and agreed upon rates for work that the general contractor performs himself. In this type of contract, there is no maximum price, so the owner is taking all the risk if the project exceeds the budget. Contractors favor this type of contract because they do not take on any of the risk related to material cost increases or labor shortages. Owners will want to be sure as to what is included as a “cost” for the contractor. When the project’s scope is not developed, this type of contract is often the only feasible method.
o Cost plus with a GMP- This type of contract is similar to cost plus without a GMP, but it provides some reassurance for the owner that the Project’s cost is capped. Typically, the contractor will develop a budget for the project, using allowances for the individual project line items such as the roof, walls and painting. Often, the budget will include a set “contingency” line item, which can be used by the contractor for cost overruns up to the contingency amount. The total budget will become the project’s GMP. Owners often find this type of contract advantageous, because if they can choose less expensive materials, they will come in under budget. In the event the owner selects something that exceeds the budget line item, the contractor can demand a change order that would increase the GMP by the item’s cost overrun.
· Timing- After a natural disaster, it will be difficult for the contractor to develop a schedule that will require the project’s completion by a certain date. However, owners will want the certainty of a project’s completion date because they will incur additional costs if the project takes longer than originally planned. Owners typically enforce a project deadline with a liquidated damages provision in their construction contract, which requires the Contractor pay the owner a certain amount for every day the project goes past the required completion date. Due to the same uncertainty, Contractors should be hesitant to agree to completion deadlines if they are not sure they can meet them.
· Insurance- Requiring the correct insurance on a project is wise for both the owners and contractors. Owners should strongly consider a builder’s risk policy, while the Contractor should carry an adequate amount of general liability coverage, and likewise ensure that their subcontractors are adequately insured. In the event of damage to an ongoing construction project, water damage after the project is complete, or damage to the already existing structure, the proper insurance will either get the project back on track, or repair the damage at minimal expense to the parties.
· Licensing- After natural disasters, unlicensed contractors often try to take advantage of unsuspecting owners. As an owner, you should check the contractor’s construction license on the Department of Business and Professional Regulation’s website. If they do not have a license, or tell you they will work under someone else’s license, DO NOT HIRE THEM. The unlicensed contractor will typically not carry the required insurance, will not be able to pull the necessary permits, and often will be insolvent if he walks away from the project leaving you out thousands of dollars, if not more.
o Similarly, if you are a contractor thinking about working under someone else’s license, or beyond the scope of your license, you are undertaking significant risk. Under Florida law, even if a project is properly completed by an unlicensed contractor, the owner can sue the unlicensed contractor to recover all money paid. Additionally, the unlicensed contractor is subject to criminal liability.
When it comes to construction contracts, the saying “an ounce of prevention is worth a pound of cure” holds true. It is much more efficient for all parties to get their rights and obligations on paper prior to work beginning, rather than ending up in costly litigation after the project is complete.
Jared S. Gillman is Board Certified in Construction Law, and has been deemed an expert by the Florida Bar in drafting and reviewing construction contracts. To discuss your specific contract, please reach out to him at (561) 623-2579 or by email at email@example.com