The Contracting Phase
Eventually, possibly after considering many alternatives, you and your builder will arrive at an agreeable combination of design, specifications and cost. Then, before actual work can proceed, you will need to enter into a formal contract with the builder that is carefully coordinated with your financing arrangements.
Contract basics: There are many sources and forms for home building contracts. Your builder is likely to have a standard form that can be customized for your project. Trade associations like the National Association of Homebuilders (NAHB), the Canadian Home Builders Association (CHBA), the American Institute of Architects (AIA) and Royal Architectural Institute of Canada (RAIC) and their state and provincial chapters develop standard contractual forms. Contract forms also vary because they need to conform to the unique building and contracting laws of each state and province. Either by writing in the body of the contract or by reference to an exhibit or addendum, most contracts will have the following elements:
- What is to be built: The official designation of plans and specifications
- What is the price: Most home building contracts are for a fixed price, but some are based on cost plus a construction management fee, either a fixed fee or a percentage of cost. It is not unusual for some decisions about finishes, equipment and furnishings to be made after the signing of the contract. This is handled by establishing an “allowance” for the item. A typical example would be an allowance for flooring. The homebuyer picks out carpet, linoleum, tile, etc. within the budget established by the “allowance,” knowing that they will need to pay for anything exceeding the budget.
- When is the price paid to the builder: Typically there is a deposit at the beginning of the project and then one or more payments as the project moves forward. These are referred to as “progress payments.” Not only are these referenced in the contract with the builder, but they must be coordinated with the terms of any construction period or mortgage loan, as we will discuss more fully. Progress payments are due based on attaining certain construction milestones. Often the final payment is made after you have a “certificate of occupancy” from your local government, allowing you to move in.
- How are the critical pre-conditions handled: There are three critical things that must happen before work can begin at the home site: (a) you must have title to the land, (b) you must have completed your financing arrangements, and (c) the builder must obtain a building permit. If you and your builder sign the contract before any of these items is in place, the contract must spell out what happens, if there is a problem. Often the contract is not signed until these things are accomplished. If there are costs that are incurred before you sign the contract (e.g., surveys, architectural & engineering services, perk tests for septic systems), they may be handled with a non-refundable or partially refundable advance deposit with the builder or a direct payment by you to the provider of the services.
- What if there are changes: The contract usually establishes a process for making changes to the design, specifications or other contract terms. There is usually a requirement that the change be put in writing, including the related cost. Many a change has been initiated when a builder and home-buyer are standing at the edge of a foundation or walking through a partially completed home. Builders will usually do their best to honor what has been discussed, but it is wise to commit it to writing as soon as possible. Keep in mind that it may be very costly or impossible to make some changes after we have begun manufacturing your home in our plant.
- When will the home be ready: The contract will usually spell out when construction will start and when it will be ready to occupy. The start date may be a specified number of days or weeks after contract signing, a specific date, or a date contingent on other things happening, such as obtaining the building permit. Often the completion date is stated as a specific number of days or months from the commencement of construction. There may be contract terms for what happens, if there are delays.
- Who is responsible for physical damage and any personal injuries during the construction period: The contract will spell out what insurance is to be provided any by whom. Typically the builder will obtain a “builders’ risk” policy that covers some or all risks of damage to your home site or home during the construction period and protects you from claims related to injuries to workers or others entering the property. Nevertheless, you will want to review construction risks with your insurance provider to determine what type of insurance you should put in place and when.
- What if there are disagreements: Despite everyone’s best intentions at the time the contract is signed, differences of opinion about the exact meaning of the plans, specifications, payment schedule, time of completion and other matters can arise. These concerns are usually resolved through informal discussion. Because it is very expensive to resolve a dispute in the court system, many contracts provide that the builder and homebuyer will work with a professional mediator or arbitrator rather than litigate. If your home is in Ontario and your home is covered by a Tarion Warranty as required of most projects by the Ontario New Home Warranty Act, you will be obligated to follow the Tarion procedure for dispute resolution.
- What if there is a problem after you move in: Most contracts reference the warranties that will cover the handling of problems that arise later. We’ll cover these in more detail.
“Scope-of-Work” Coordination: A crucial part of the contracting process is performed by your builder, who must make sure that everyone working on your home knows what to do and when. While we are probably the largest sub-contractor for your home, there is always some site work performed by the builder or other sub-contractors. Every party must know their particular “scope-of-work.” As an example, there is always some plumbing work at the site. Our products will arrive with some of the water piping and sanitary drains, but a local plumber will need to connect piping and drains between modules and to the municipal water and sewer systems or to your individual pump and septic system.
Your builder wants to avoid two kinds of errors. First, the builder wants to avoid duplication where more than one sub-contractor has built in a cost for doing the same thing. That obviously raises total cost unnecessarily. Second, and more serious, the builder wants to avoid something “falling through the cracks” where no-one has built in the cost to complete a necessary task. The builder has a separate contract with each party working on the site under the builder’s direction, which contains sufficient detail to define the exact boundary between each party’s individual scope-of-work.
If you are going to perform any of the work yourself, it is vitally important that you have a clear understanding of what it involves.
Financing Coordination: If you are putting in place a permanent mortgage loan, it is contingent on your home’s value as collateral as verified by an independent appraisal. The appraisal is based on a comparison of the design, specifications and location of your home with other relatively similar homes. Therefore, the mortgage loan documents will almost certainly require that your home be built to the agreed design and specifications, which in turn must match those cited in your contract with your builder. You will want to be sure that the design and specifications are essentially identical in the mortgage and builder contract. A typical mortgage loan commitment is usually contingent on your occupancy of the home by a stated date. You will want to be sure that your contract with the builder requires completion within at time frame.
If you have a construction-to-permanent mortgage loan, which is providing financing during the construction period, it will contain definite requirements for start of construction, completion of construction and certificate of occupancy from your local builder. If you have a separate construction loan, it must be coordinated both with the permanent mortgage loan and with your contract with the builder.
Finally, release of funds by your lender (or lenders) must be coordinated with the deposit and progress payment schedule in your contract with your builder. If some or all of the funds are coming from your own savings, you will need to move them into a liquid form according to the schedule in the contract. Your contract with your builder may require that you provide proof of your loan commitment and the availability of your personal funds. Proof of an adequate loan may include a requirement that your lender, your builder and you execute what is known as an “irrevocable assignment of funds” that assures that we and possibly other sub-contractors will be paid from the loan proceeds. You may need to make arrangements with your bank, broker or investment advisor to have personal funds made available as a certified check. You may encounter other legal forms as part of your financing arrangements.
The “Closing” on Your Contract with Your Builder: Ultimately, you and your builder will have finalized plans, specifications, costs and time-of-performance and coordinated everything with your source of funds. It then becomes time to sign the contract, a sort of ceremonial milestone, often referred to as a “closing.” It is not unusual for the “closing” on your building contract to occur simultaneously with the “closing” on your loan and/or with the “closing” on the purchase of your building lot.
Your Builder’s Contract with Hi-Tech Housing: In most of our builder relationships, we enter into our master sales agreement that will cover all homes that the builder purchases from us, and renewable annually. When you have closed on your contract with the builder and any lenders, the builder will sign a specific “sales order” with us which references the design, specifications, scope-of-work, price and time of performance for your particular home. For homes built in the US and utilizing our installation service, the order will also reference the particular installation services we are providing.
Another possibility is that we will enter into an individual sales agreement with the builder that only covers your home. This sub-contract may be based on our standard form or a generic sub-contract form.
If you or your builder makes a change in our product after our sub-contract with your builder is finalized, we will work with the builder to sign a change order in the sub-contract. This will need to be coordinated with a written change order to your contract with your builder. It will probably be very costly or impossible to make a change after we have begun manufacturing your home.
Deposits and Building Permit: As a condition of starting work on your home, our sub-contract with your builder will require a deposit that will vary with the amount of unique and special materials in your home. The builder may include this amount in an initial deposit collected from you or as a separate progress payment.
Depending on the plan for obtaining a building permit, we may have already obtained through your builder, a deposit to prepare sufficient drawings to obtain federal, state or provincial design approval even before we execute a sub-contract. If not, the initial deposit will also be our signal to prepare the “permit set” of drawings and obtain the government approval of our product, which your builder needs to obtain the local building permit for your home.
With your financing and building contract in place, with the signing of our sub-contract with your builder, with our receipt of a deposit and the successful procurement of a building permit for your home, we are ready to move to the next phase. For our part, we need one last thing – a formal notice from your builder to us that we should begin.