By Susan Van Bell, Esq., AIA Contract Documents Content Contributor
October 29, 2021
Risk management is an essential consideration for any project. It is particularly important for home builders. You are typically working with a client who is emotionally invested in the project and who likely is not familiar with how the construction process works. Accordingly, it is up to you to educate your client, manage expectations, and structure the project to mitigate risk. Your contract is an essential tool to assist with all of those things. This article will address communications, statutory requirements, and the payment process as examples of topics of importance for risk mitigation. Two recently published documents will be used to illustrate these issues: AIA Documents A111™–2021, Standard Form of Agreement Between Owner and Home Builder for Construction of a Single Family Home (A111) and A112™–2021, Standard Form of Agreement Between Owner and Home Builder for Design and Construction of a Single Family Home (A112).
Communications encompasses a wide variety of issues in a residential construction project. It is important to understand what the client expects and to educate the client on the scope of the work you will provide and the process to get that work done. A good owner/home builder agreement can walk your client through much of that information. It is important to be sure your client has read the agreement and had an opportunity to ask questions about anything that is not clear. You want to make sure your client provides all of the information that is necessary for you to successfully complete the project. For residential construction, this would include items such as information about property or site covenants, conditions, and restrictions; Homeowners’ Association requirements; and any other special characteristics or requirements of the Project.
In addition, while it may be tempting to address certain project issues verbally or by a handshake, it is much better to have a written agreement to avoid miscommunication and misunderstanding. This protects both parties. For example, A111 and A112 require that changes in the work that arise during the course of the project be documented in writing, with appropriate revisions made to the contract sum or time. This is important to avoid disputes about changes. Another important area to consider is the owner’s rejection of work, as an owner may unknowingly hold you to a standard that is greater than what is required. A111 and A112 require that the work be performed in accordance with the requirements of the contract documents and other documents that may be listed in a fill point. You might want to consider including a reference standard for acceptable work, such as guidelines published by the National Association of Home Builders, National Wood Flooring Association, Tile Council of America, or other industry groups or manufacturers. This would provide you with something that you can refer to, should the need arise, to show your client that your work conforms to an accepted standard that is part of the contract.
These are only a couple of issues illustrating the importance of using the agreement to foster communications and provide clear requirements to help avoid projects delays and disputes.
Another important area that a home builder must know about is whether there are any specific requirements in your jurisdiction for residential construction. The contractual and licensing requirements for construction of a single family home may vary in different jurisdictions. It is also becoming more prevalent for residential construction to be viewed as a consumer protection issue for the homeowner. Statutory requirements for items that may be required in a contract may include consumer protection notices, warranty requirements, mechanic’s lien notification requirements, and other jurisdiction-specific or statutory requirements. A111 and A112 contain fill points to prompt the parties to consider whether there are applicable jurisdictional requirements. You may need to talk with a local construction attorney to be sure you are in compliance with any such requirements.
Scheduling and the payment process are also critical to risk mitigation. A111 and A112 contain fill points to provide the dates of commencement of construction and substantial completion. It is important to be realistic about these dates so that your client’s expectations align with when you can start and complete the project. The contract sum, if it is a fixed price contract, should be stated, as well as allowances, and any assumptions or exclusions that you are incorporating into the contract sum. There are various ways to handle payments. A111 and A112 allow the parties to develop a payment schedule based upon construction milestones by providing a fill point to list the details of the schedule. There is an alternative section that addresses the situation where payments are to be made in accordance with a schedule established by a construction lender. A112 has a separate compensation section for the pre-construction design work. A111 and A112 also have a section in which you include the number of days after you submit a payment request to the owner that the owner has to make the payment.
If you are concerned about whether the owner has the funds to pay for the project, A111 and A112 have a provision that permits the home builder to make a written request to the owner, prior to commencement of the work, to provide reasonable evidence that the Owner has made appropriate financial arrangements. The Home Builder does not have to commence the Work until the Owner provides the information.
These are only a few examples of the issues that you need to consider. It is better to have a thorough detailed agreement than a short one that doesn’t address key issues. Explain to your client that the agreement is for the protection of both of you.
Author: Susan Van Bell, Esq., formerly Senior Director of Content, AIA Contract Documents; currently providing professional services as a consultant. Susan may be contacted at srvanbell@gmail.com.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.