Contracting for Residential Construction:
Is there Such Thing as Too Good a Deal?
by John Tweedy, From Boulder County Bar Association Newsletter, 2013
When it comes to negotiating a contract to build or remodel a home, there is a growing perception these days that the Owner is in the driver’s seat. With the current downturn in the real estate and construction markets, many Owners have a sense of leverage over Contractors. At the same time, the tight lending environment can lead to extremely tight construction budgets, with little margin for error in bidding or change orders along the way. As a result, some Owners are bargaining hard at the contract table. As part of our practice, Robinson Tweedy represents some clients who are Owners, and others who are Contractors, in such negotiations. We also represent both Owners and Contractors in lawsuits where construction projects have failed. This experience from all sides of the table has led us to conclude that, in fact, there is such a thing as too good a deal.
Increasingly, Owners want reductions in Contractor’s fees, overhead and profit margins. Some Owners also want to retain a percentage of each progress payment, in order to use the retainage as leverage over the Contractor at the time of project completion. Owners, naturally careful about receiving lien waivers from subcontractors in exchange for payment, may ask to receive such waivers in advance of approving a draw. Owners concerned about controlling costs may insist on fixed-bid contracts and object to open-ended allowances for fixtures, appliances, and finishes. Some Owners may balk at paying advance deposits on long-lead-time items such as windows.
Winning on each of these points, considered in isolation, represents an advantage for an Owner. But taken together, the cumulative effect of such “victories” may actually jeopardize the Owner’s most fundamental objective: the timely completion of a high-quality project. Why? Because each of the items listed above can effectively force a Contractor to finance some of the construction. Reducing a Contractor’s overhead and profit, while at the same time withholding retainage from every draw, may mean that the Contractor has to loan money to the project from his own funds in order to pay the cost of subcontractors, suppliers, and his administrative home office. Requiring lien waivers in advance of approving pay applications forces a Contractor to front the money to the subs before getting paid the Owner. Unless a project is meticulously planned in advance, down to the last towel rack and cabinet pull, the lack of finish allowances means that costs will likely rise when the Owners go shopping for finishes. Refusing to pay a deposit will require the Contractor, again, to front the cost. The more such costs a Contractor bears, the more financial stress is placed on the project, and the greater the likelihood of change order battles, cost overruns, and delays. Worse, making a Contractor finance the Owner’s construction can lead to unpaid subcontractors, misapplied payments, and defects resulting from corners cut in the construction itself. Add the risk of unforeseen events such as different site conditions, bad weather, or accidents to the mix, and the project runs into serious trouble.
In the end, an Owner who negotiates “too good a deal,” and a Contractor who agrees to it because he wants the work, may be putting themselves on a collision course towards an outcome neither of them wants. The old maxim, “a good contract is a good deal for both sides,” applies to residential construction -- in spades.