TEN POINTS TO CONSIDER REGARDING THE TAB CONSTRUCTION CONTRACTS
By: Stephen L. Polozola
In 2005, the Texas Association of Builders promulgated a set of form construction and sales contracts. One purpose in creating these contracts was to establish conformity and a level of comfort with builder contracts. In using the contracts, builders should be aware of the following ten provisions and their impact on the construction process.
1. Parties. While it would seem relatively obvious, properly documenting the parties’ names is imperative. If the homeowners are married, both spouses should be identified and sign the contract. With respect to the builder, the full legal name should be listed. Additionally, the corporate name should be included in the signature block and the person signing on behalf of such company should identify his title. If a builder fails to identify his capacity, he could implicate himself individually and lose the protections of the corporate shield.
2. Construction Documents. In working through the design of a home, parties often go through several variations of specifications and plans. The final set of construction documents should be referenced in the contract, initialed and identified by date and description in the contract. This level of detail can avoid disagreements as to which set of construction documents is controlling.
3. Option to Terminate and Termination Damages. TABS’s mechanic’s lien contracts permit the builder to terminate the contract if a dispute arises between the parties prior to substantial completion. If such dispute arises, the builder may terminate the contract but is required to return to Owner the “Termination Damages portion of the Initial Cash Payment.” The confusing part here is identifying the “Termination Damages.” When identifying the Initial Cash Payment, the contract also requires the builder to specify what portion of such Payment the Builder will return to Owner if the contract is terminated. It is recommended that an absolute minimum amount be set forth as the Termination Damages simply because if the builder terminates the contract, it will be required to return such sum to the Owner.
4. Additional Cash Payments. After construction commences, the builder will need to submit periodic requests for additional cash payments (what we commonly know as draws). The contract identifies when and how these requests will be submitted. Consideration should be given to the draw schedule, what percentage of the contract price should be paid based on the work performed, and who will inspect the work to confirm it was performed prior to payment. With the draw schedule commonly prepared by the bank, it is also important for the builder to verify that the terms of such schedule will work for your project.
5. Time. Given that most owners will finance construction, identifying when construction commences and a completion date is often of utmost importance. The mechanic’s lien contract provides that the commencement date shall not occur until specific acts take place (i.e., building permit issued, financing obtained, and construction documents are approved). When determining the completion date, builders are encouraged to overestimate the needed time. Consequently, if you come in earlier than predicted, your customer will be quite thankful for savings on interest payments. Also, when negotiating this contract, builders are encouraged to retain the provision that states “Builder does not warrant or guarantee completion of the Improvements on any specific date.” Removing this provision from the contract could subject the builder to a claim for additional interest payments and loss of a low interest rate if construction is not completed by the completion date.
6. Allowances. Most construction contracts provide allowances or budgets for certain work. The sums allocable to each allowance items should be included in the contract price. In the event the allowance selections exceed the allotted budget, the Owner should be advised that any increase will necessarily increase the contract cost. Therefore, in order to stay within your budget, be sure to spend time evaluating the allowance items well in advance to avoid any surprises.
7. Change Orders. Documenting the change order procedure and any changes to the scope of work and contract price is tedious. However, properly documenting the changes as required in the contract can prevent disputes between the parties. If the parties change any portion of the specifications or scope of work, such change should be evidenced in writing, including any increase in contract amount, and extension of days to reach completion. A builder’s failure to document such changes could substantially impact its ability to recover such costs if it is necessary to proceed to arbitration. Builders are encouraged to consider revising the contract to provide that a builder does not waive its right to collect for change orders even if the required procedures are not followed.
8. Insurance. One of the most important but often overlooked provisions in a construction contract relates to insurance. At a minimum, each project should be insured with builder’s risk insurance, commercial general liability insurance, and potentially worker’s compensation. In considering the policy limits, the parties should evaluate the soft cost limits on the builder’s risk policy. In the event of a casualty loss during construction, the soft cost limits are often not high enough to cover the interim interest on a construction loan during reconstruction. The policy limits on the CGL policy should be a minimum of one million dollars per occurrence and potentially higher, depending on the contract price. The contract should also be revised to address who is responsible for the premium and deductibles.
9. Warranty. With the creation of the Texas Residential Construction Commission, all builders are required to provide a statutory limited warranty with the construction of new homes. This warranty mandates that the builder provide a one-year warranty on workmanship, two-year warranty on systems (HVAC, electrical, and plumbing), and a ten-year structural warranty. Builders by using the TAB independent contractor agreement can also pass along their TRCC obligations to the subcontractor. If a subcontractor attempts to negotiate this contract, builders are encouraged to not allow any revisions to the warranty portion of such contract. Further, builders would be wise to consider a third-party warranty to insure against possible structural complaints. In the event a structural complaint arises, the builder can rely on such third-party warranty to absorb the cost of repair.
10. Fluctuation in Cost of Materials. On occasion, the cost of materials will vary substantially from the time the project is bid until the time the material is ordered. Builders should be aware that in certain circumstances the mechanic’s lien fixed price contract allows the builder to pass on these cost fluctuations to the owner
In considering these terms, the parties can ensure construction goes smoothly and without any problems. A well-written contract can anticipate, address, and avoid potential problems.
Stephen L. Polozola is an attorney with Decker, Jones, McMackin, McClane, Hall & Bates P.C. in Fort Worth and focuses on residential construction. The commentary implies no specific legal advice. Contact Polozola at 817-336-2400 or spolozola@deckerjones.com