Building The Family Compound: A Construction Lawyer’s Home Project
In 1974, my wife and I moved into a 990 square foot Tucson “box” ( four rooms, a flat roof, no style), but in a beautiful neighborhood by the University of Arizona. Today, we live at the same address, but not the same house. Over time, our house evolved into a compound stretching from one block to the next, including homes for our college aged children, a separate home for in-laws and an additional house where my father lived.
Just as the shoemaker’s children go barefoot, this construction lawyer’s wife was to build the projects with some help from me and a lot of help from valued construction professionals whose competence and advise were invaluable. Our experience presents an opportunity to help others.
The construction process can be viewed as the interaction of four main forces:
|DESIGN PROFESSIONAL||BUILDERS||OWNER’S INTERESTS||GOVERNMENT|
Crafts and Labor
Commercial General Liability
Builder’s Risk Insurance
Owner’s Directions –
Who’s running the job
Husband and Wife
Our project began with a wish list: The expansion of our living room and dining room to accommodate large holiday and Friday evening dinners. In our original house, when we extended the dining room table, we couldn’t open the front door. We fill our walls with art, and the living room had a large window with a western exposure, creating an oven in the summer. So, we wanted tall ceilings and clerestory windows.
Our most radical change, demolishing the front and going from a small flat box design to 15 foot walls, involved working with three different architects until we found a design that exceeded our expectations. With this last design, rather than a bigger box, we had an inspiring design.
When deciding to build, one must anticipate the stress on one’s domestic relationships. It is quite common for home construction projects to end in divorce. The earlier you, as a couple, decide who is responsible for running the project, the less the conflict. It took some time for our architect to accept that whatever my wife, Molly, said I agreed with.
In hiring an architect, referrals are an excellent start. Review the architect’s prior projects. Some architects have a consistent style; if your style does not match theirs, trouble will follow. Others will learn what you want and the design will be based on your interests. Evaluate the ease of communication with the architect. Did the architect listen to you? Did the architect ask good questions? Did you feel comfortable dialoguing? Did you have to reiterate your change requests? Did the architect understand your interests and concepts? If you cannot communicate well, choose another architect.
Developing plans and construction takes a long time and it is important to develop time lines for the production of documents. Each professional will have a work schedule and projects. Part of developing a relationship is being honest about when to expect the next set of drawings, what type of workload that architect has. Does the architect subcontract out the work, does the architect have a staff that does the work, or does the architect do all the work? Reduce your anxiety by extending the time you expect to finish and increase your budget for the inevitable changes.
Tip: You should obtain a soil report for your project unless you are certain of the existing conditions.
In developing “a program wish list,” look at the outside as well as the inside, e.g., do you have enough storage? Do you want privacy from the neighbors? Do you want an outdoor extended living space? In our original house, glass block provided interesting exterior design features, so our architect incorporated those features in the new design.
Tip: You will need the cooperation of your neighbors. Before you start, show them your plans. You may need their help if you must obtain set-back approvals. Will parking be a problem during construction? Will you need access to a neighbor’s yard? Be aware of the noise levels.
In preparing a program, also think about function, style and finishes. The more detail you provide, the more your architect can create your vision. The final plans should be as detailed as possible. Before you finish the plans, go to all the supply houses, look at the fixtures, materials, and finishes available and base your budget on actual choices. We developed a safety/emergency outdoor lighting system so from inside and from the car we can turn on all the outside lights with a single switch. If you include your “wants” in the original plans, you’ll have fewer change orders and pay less.
As our house was built in the late 40s, we knew to budget the replacement of all utilities. Be prepared for surprises such as ours when we removed a bathtub and the plumbing was so rotted that it was questionable where the water flowed as it drained. When you build, plan for further demand. Put in a excess capacity for future needs. For instance, include on your plans connections for solar utilities, grey water and other potential energy sources, even if you don’t intend to use them now.
Your contract with the general contractor should include a fixed price for the entire project, if possible. Some contracts might include allowances for such items as flooring, cabinetry, appliances or even landscaping. Understand that the number will go up or down, usually only up, depending upon your selections. So, try to select your allowance items before you enter into the contract. And, make sure no additional overhead or profit is increased if your allowance choices are more expensive.
Contractors are entitled to their profit; they work hard. But in order to know that you are paying bills based upon performance, you should require a schedule of values from the general contractor. For each item of work, there will be a stated separate cost of labor versus material. It must identify who is doing each element of the work, the contractor or a subcontractor. In Arizona, owners typically receive Twenty Day Preliminary Lien Notices. Compare the amount stated in the preliminary notice with the amount in the schedule of values. If they differ, there is a problem.
Ask which subcontractors will be used. Our original house had stained concrete floors, common in our area in the 40’s. In our first addition, the concrete stain was done so poorly that it is now covered with tile. Therefore, in our next project, we checked the expertise of the concrete sub, and reviewed procedures and materials with a very knowledgeable structural engineer with extensive expertise in concrete to make sure we achieved the scored concrete floor we wanted.
Payments should be based upon the actual work performed, whether payment is made each month or based upon completion of stages of the work. The pay requests from the contractor should be for the actual work performed, plus the stored material. Also, if you pay for material before it is incorporated into the project and it is stolen, who is responsible? If you are responsible, is there a deductible to your insurance?
A significant dispute in residential construction is whether you will have liquidated damages for late performance. Liquidated damages are a set dollar amount assessed each day the project is not substantially complete. It may be the only incentive that subcontractors and the contractor have to complete the project. Actual damages, additional living expenses, additional costs for interest, increased costs for permanent interest, and other damages are potentially recoverable. But, if they are not identified to the contractor prior to beginning construction, the contractor has an argument that it did not know what damages would occur due to late construction. Liquidated damages eliminates the argument.
One method for liquidated damages is to require a schedule from the contractor, add thirty days to the date of substantial completion and then assess liquidated damages from that date. The daily amount for liquidated damages should include at least potential interest costs, extra rental costs, and other costs that you incur if the project is late.
At the beginning of projects, Owners are thrilled with their architect and contractor, rarely thinking that anything will go wrong and are loathe to include conditions that will protect their interests. However, progress payments should be subject to retention, in which every payment to the general contractor is reduced by a certain percent (e.g., 10%), which is retained or held back until completion. Retention and liquidated damages are commonly rejected by residential contractors. But, they are the only real leverage that an owner has to motivate a late project.
Do not pay an advance deposit for construction. Contractors typically don’t need to buy material before the start of construction, and they should have enough money in the bank to mobilize and pay their staff.
Another concept often rejected by homebuilders is to bond the contractor. A performance bond is issued typically by insurance companies who guarantee that the project will be completed in accordance with the contract documents for the price agreed upon. Significantly, it also is a guarantee of latent defects which may occur after the contractor is not in business. Be wary if a contractor cannot provide a bond as it raises the issue of their credit and financial worthiness. The bond is an extra cost to the owner, typically 3/4 to 1-1/2%. Many homeowners find substantial defects five years after the completion of their project, and a contractor who is no longer in business. Without a bond, there may be no one responsible.
A great concern is the quality of finishes. For many homeowners, the standards required by the Arizona Registrar of Contractors (or similar licensing agencies) may not be what the owner desires. In the preparation of plans, an owner needs to identify all finishes expected: smooth or rough drywall, how the corners are to be made, what kind of molding, and where the molding will be. Each item of work needs to be examined and the plans need to state the detail expected. If not, either it won’t occur or you will pay more. Another project by the contractor or the finishes in a friend’s home could be identified as the standard expected. Or, an owner can identify in the plans, or contract, examples of the finishes expected. The same concept could be used for allowance items. As an example, if the contractor promises to install cabinetry equal to a model or a prior project, the contract should contain that detail and the price.
Change orders should be minimized – the more detail incorporated into the plans, the fewer the change orders. The contract should identify the overhead and profit to be charged for change orders, and whether the same overhead and profit will be deducted for change orders which reduce the scope or size. However, as you may expect to live in your home a substantial time, as each stage of construction starts, envision what each room will look like. As the project is framed, look at it and discuss with your architect and builder any alternatives you deem necessary. Don’t skimp on the quality of materials; it is worth the money to live in a better environment, rather than have later regrets.
Many contracts are “handshakes” – oral contracts. In addition to the problem of each party’s memory of the terms, there will be no requirement that the contractor and subcontractor name the owner as an additional insured on their insurance policies. If there is an injury on the job, is there workers’ compensation and indemnifications of the owner? While it can be argued that common law indemnity would still require the owner be indemnified, a written indemnity, coupled with minimum insurance requirements, including workers’ compensation, is one benefit of a signed contract.
At a minimum, a written contract should identify:
- The scope of the work to be performed; identify the plans by the date of each sheet. Include all specifications if separate;
- The total price;
- Insurance requirements;
- Mediation clause;
- Arbitration clause;
- Time is of the essence clause;
- Indemnification and hold harmless;
- Attorney’s fees clause, attorney’s fees paid to the prevailing party;
- A clause providing that the owner will be a third-party beneficiary of all subcontractors’ performance and warranty;
- A warranty clause (in Arizona an owner can go to the Registrar of Contractors for two years following completion.) The warranty should provide that the work will be without defect and built in accordance with the plans and specifications;
- The Quality standard for all finishes. An owner should definitely identify if their expectation of quality is more than the standard home. If your expectation is high, you want to say that explicitly in the contract;
- Change orders will be based upon the actual cost of material and labor. Insist that the contractor track the time involved, you compare your notes with theirs.
The owner’s contract with the general contractor should be explicit in identifying whether a superintendent will be on the project at all times. If a contractor hesitates, that means there was no plan for a full-time superintendent. Considering the price that you typically pay, someone should be watching all the work of the subcontractors. In addition to the indemnification, insurance, and workers’ compensation requirements, the owner should be a third-party beneficiary of the performance and warranties of subcontractors. This allows an owner, years after the project is finished, if the general contractor is no longer in business, to make a claim against a subcontractor. Otherwise, complicated court decisions may prohibit the owner from suing a subcontractor.
The general contractor should be financially responsible for the work of the subcontractors, as well as for the safety of the project site. Do not enter into a construction management agreement where you are contracting directly with subcontractors. That means you take the financial risks in the event the subcontractors fail.
The mediation and arbitration clauses in your contract should allow joining your claim against a contractor with the architect. You do not want to have two separate procedures on one single project, one claim against the architect, and the same claim against the contractor.
The warranty should require all work to be without defect and in compliance with the contract documents. That is separate from the warranty maintenance of one or two years. Correction of defective work should not be limited by any warranty.
Tip: Proper protocol is for the owner to direct comments through the general contractor. However, compliments should be offered to everyone.
Establish positive expectations so each trade will do as well as their predecessor. For several of our projects, each trade saw that the quality of the craftsmanship of the work done before them was high. Measurements were exact; fit and finish was first rate. Each trade, seeing that the prior work was done well, understood and met expectations. To help create a positive work environment, we provided amenities that helped. When the work was done in the summer, we provided shade. We provided cold water, soda, pizza. We also insisted on a clean and safe workplace. When a frayed electrical extension cord was pulled out, we provided a new, OSHA approved cord.
Tip: Construction projects are potentially very dangerous. Insist on safety, even if there is a potential confrontation. Dangerous conditions should be well marked and safety made a priority.
Document the project as it occurs. Take pictures daily. All changes should be in writing; with a copy kept by you, the contractor and the architect. Costs of change orders should be identified before the work is approved or started. Except for emergencies, you want to know how much you will spend before you spend it. As you prepare your budget, increase the budget by at least 15% for changes. That money is in your budget, not the contractor’s.
Unless you have substantial experience, pay your architect for construction administration, including reviewing the construction process and approving payments. The contract should include a review at the end of the warranty period. The architect should also review the as-builts required in your construction contract; these show the actual location of construction.
To have a successful project, you need to be flexible and creative. Each project begins with a contractor believing they have ample profit in the job and ends too often with contractors and subcontractors never wanting to return to the project. Mistakes will happen, people will not show up when they are scheduled and needed. Your directions will be ignored. You want to establish a good rapport early, so when you need the extra effort, you have a reserve of goodwill upon which to call.
Tip: Use the expertise of your suppliers and subcontractors and the contractor. Talk to them. Ask them questions, ask them what they think, ask them if there are any problems they see.
Think of what will meet your needs. Extra lumber used as backing behind drywall will make hanging pictures and mirrors easier. Consider using steel framing rather than wood; the finish is more exact although the cost may be more. Envision the project finished and see if more windows or skylights are needed. Look at the plumbing and mechanical designs. Is more insulation needed? A relatively small cost might save energy dollars in the future. Make sure the holes in the roof are sealed before the roofing is done. Look at each window and opening, is adequate flashing properly installed?
Look at future maintenance requirements. Are your outside windows covered with aluminum so no painting is required? Have you developed a good relationship with your important subcontractors, the plumber, roofer, mechanical – they will be the ones you call when there are problems. Is the mechanical (heating and air conditioning) in separate zones? Do you want radiant floor heating which might save money and extend the useful life of your systems? Are the electrical boxes properly marked? Do the plans contain designs for technology, e.g., WIFI?
Develop a rapport with the government inspectors. Make sure the plans are easily available onsite for their review. Talk to them and ask if they have any problems with the work. Make sure that as-builts are being developed by the contractor as the project progresses and that pictures show each phase of the work each week.
Promptly pay for work performed. Don’t pay for work not performed. Use the schedule of values showing the ultimate labor and material costs of each subcontractor and the general contractor. As each payment is made, you should receive lien waivers for each subcontractor and supplier. Until your payment is received and the check is cashed, your lien waivers are only conditional. As the next payment is made, you should receive unconditional lien waivers from all subcontractors and suppliers for the earlier payment. A lien waiver by a general contractor does not waive the rights of a subcontractor or supplier. (In Arizona, to have a lien on a residential owned project, there must be a written contract with the owner.) The contract should provide that you have the right to pay by joint check. The check will be payable to both the general contractor and the supplier or subcontractor for the exact amount due to that particular subcontractor or supplier. At the end of the project, you need to obtain final lien waivers from all.
If problems occur, immediately notify the general contractor and your architect. If one side claims it is the plans, and the other side says it is the contractor, find a neutral expert to examine the problem. Take pictures, create documents, but don’t ignore the problem. It won’t be fixed on its own. Be patient, be calm and be fair, but require everyone to do a good job. If there is a claim by a subcontractor or supplier and you are not the cause (you did not make the payment) you should retain 150% of the claim unless the contractor provides a bond.
Our architect and contractor exceeded our expectations, and we now sit in our house at night and marvel looking up through the windows and seeing the moon. When there is lightning, we can look 360º and see the storm around us. There are no parts of the house where we say, “We should have changed that.” We walk into the house and say, “This is a great place to live.”
RECOMMENDED ADDITIONS TO ARCHITECTURE CONTRACTS
- Owner will have the right to join architect and general contractor in single mediation and arbitration.
- Require a time schedule for architect to produce documents.
- Architect is to advise Owner in writing when it is aware of any conflicts, errors, omissions in the Construction Documents or defects in construction of the project.
- If the cost of the project as bid or negotiated exceeds the Owner’s budget by ____X____ percent (e.g., 15-20%), architect will revise the Construction Documents at no additional cost.
- Owner will be advised of all consultants, third parties hired by Architect in connection with the preparation of the Construction Documents, Owner will have a reasonable right of approval and Owner will be a third-party beneficiary of such contracts. Third party contracts will contain a provision making a third-party beneficiary and will require the same professional error and omissions insurance and commercial general insurance required of Architect.
- Architect will be liable to Owner for additional costs incurred by Owner due to conflicts, errors or omissions in the Construction Documents.
- All documents, plans, sketches, models, etc., prepared by the Architect, including the schematic designs, the Design Development and the Construction Bid Documents are to be used solely for this Project and the Architect shall be deemed the author for copyright. The Owner shall have ownership of all documents and Owner will be provided copies requested. Owner agrees that these documents shall not be used for any other project without approval and compensation to Architect. Architect shall not use these documents for any other project. Owner shall have an irrevocable license to use, reproduce or make derivative works from these documents for any renovations, maintenance or remodeling of the Project. Owner shall have an irrevocable license to use the image of the Project and to reproduce documents and data obtained within the documents. Architect is responsible for accuracy and adequacy of the plans. Further, the Owner shall have an irrevocable license to use and reproduce the image of the Project designed by the Architect.
- Architect will review as-builts prepared by contractor for accuracy.
- Architect’s services for construction administration include one year warranty inspection.
- The construction documents will require contractor to prepare photos and daily logs during the progress of the project. Architect, Engineer, Contractor and all subcontractors which prepare records of the project (daily logs, field reports, job meeting minutes, etc.) will exchange copies weekly.
- If Architect is retained for construction administration, Architect will review lien waivers of contractor, subcontractors and suppliers with each pay application.
- Architect’s contract is entered into based upon a standard of mutual trust, good faith and fair dealing. Architect’s services will meet the “highest” standards of the community in preparation of the Construction Documents.
- Owner has the right to terminate the project at any time for convenience of Owner and Owner will pay for all work performed to date as well as any additional costs for obligations which cannot be terminated.
- Architect is to cooperate with Owner’s General Contractor in value engineering changes to the project.
- In designing Construction Documents, Architect will identify resulting effects of costs savings (if the Owner expects a quiet environment and the HVAC system is on the roof, if the roof is too light, vibration noise will be reflected in the building. If lightweight concrete is used for a floor decking, the stability of the floor may be affected if other design changes are not examined.)
- In the event of any arbitration or litigation, the prevailing party will be paid reasonable attorney’s fees, costs of expert witnesses and costs of the arbitration or litigation. (In Arizona, if arbitration does not contain an attorney’s fees provision, the Arbitrator cannot award fees to the prevailing party.)