Home remodeling can be an exciting endeavor, but it also involves significant financial and legal commitments. At Curbside Attorney, we understand that your home is likely your largest investment. That’s why we recommend involving an attorney in any major remodeling project to ensure everything goes smoothly and your interests are protected.
1. The Importance of a Written Contract
The cornerstone of any successful remodeling project is a well-drafted written contract. This document should clearly outline the scope of the work, project timelines, payment schedules, and other critical details like warranty and dispute resolution procedures. A written contract not only sets expectations but also provides legal protection for both parties. An attorney can help draft or review this contract to ensure that it covers all necessary aspects and adheres to local laws.
A few important points about construction contracts:
a. Never sign or use a Texas Association of Builders ("TAB") contract. They are horrible and favor the contractor at the expense of the homeowner. They are unfair.
b. Most contractors have bad contracts so it is rare that we recommend using the contractor's offered contract. Most contractors have unfair contracts (like the TAB contract) that favor them in an unfair manner. Be very careful. Remember - you have a lot of negotiating power since you are the one with the project and the money.
c. Never sign a contract that requires a large upfront payment or deposit. Deposits should not exceed 10% of the project total. If a contractor demands more than 10% you should question it. If they demand more than 20%, you should run!
d. In residential construction, most contractors will ask you to "waive" retainage. While we do not like this, we recognize that it may be necessary in order to get the contractor you want. However, you need to understand what retainage is and how it protects you. Retainage is a small amount that the owner "retains" from each payment. This retained amount serves as a protection to the owner that the contractor completes the project and pays his subcontractors and supplies. If you waive it, you waive these protections.
2. Vetting Your Contractor
Choosing the right contractor is crucial. Proper vetting includes checking references, verifying licenses and registrations, and reviewing past work. An attorney can assist in conducting due diligence to ensure that the contractor has a solid reputation and the necessary qualifications to complete your project successfully.
3. Understanding CGL Insurance
Commercial General Liability (CGL) insurance is essential for any contractor. This insurance protects against claims of bodily injury and property damage caused by the contractor’s operations. It's important to understand what CGL insurance covers—and what it doesn’t. For instance, it typically does not cover poor workmanship. An attorney can help you understand the limits of a contractor’s CGL policy and advise if additional coverage might be needed.
Are few additional points about insurance:
a. There is no such thing as "full insured." If a contractor tells you that, they are clueless and you should really question whether to use them. In our experience, this type of statement is a common statement contractor's use to induce homeowners to trust them. Whether the contractor knows this statement is a misrepresentation is debatable, but it is certainly not accurate.
b. Most CGL insurance policies do not cover the "work product" of the contractor - that means they do not cover defective work. However, the policies can cover consequential damage to "other property" that is not the subject of the contractor's work. What would that be? Well, if the contractor is building a swimming pool and during that work, the negligent construct the pool which leaks and the leaks damage your home's foundation. The damage to the foundation is probably covered, but the defectively constructed swimming pool is not.
c. The contract should require CGL insurance. Moreover, always ask for a copy of the ACCORD Certificate of Insurance and the actual insurance policy. There are contractors who use fake or fraudulent Certificates of Insurance. requiring the policy is a protection against such conduct.
4. Fixed Fee vs. Cost-Plus Contracts
Understanding the difference between fixed fee and cost-plus contracts can help you choose the best payment arrangement for your project.
Fixed Fee: A fixed fee contract means the contractor agrees to complete the project for a set price, providing budget certainty unless you agree to change orders. The risk of increases in labor or materials is normally on the contractor in a fixed fee contract. However, the contractor normally will not tell you the actual cost of the pool and you have no idea what the contractor's profit margin is on the pool. Many contractors like to hide their profit margins by using fixed fee contracts. A reasonable profit margin on a residential construction project is between 10% and 30%. The larger the total project cost, the lower the contractor's profit margin. So, a $10,000 project may have a 30% profit margin (i.e., the actual cost of construction is $7,000 and the contractor makes $3,000). When the cost goes up, profit margin should go down. So, for a $300,000 project, the profit should be lower, like 15% to 20%, or $45,000 to $60,000).
Cost-Plus: In contrast to a fixed fee contract, a cost-plus contract involves paying the contractor for all project costs plus a fee, which could vary depending on the actual costs incurred. Under a cost-plus, the risk of increases in cost of labor and materials is generally on the homeowner. A cost-plus contract has the advantage of showing you exactly how much profit the contractor is making. Normally, the contractor's compensation is a "builders fee" that is a percentage of the total cost of construction. So, if the total cost of construction is $100,000, and the builder's fee is 20%, then the builder is paid $20,000 and reimbursed for the $100,000 cost of construction. This means the total cost of the project is $120,000.
Here are a few more points about contracts:
a. You should never sign a contract without an attonrey reviewing it or drafting it.
b. We recommend asking the contractor to disclose his profit margin on fixed fee contracts. If it is more than 30%, we recommend choosing a different contractor. If they will not disclose this, we also recommend choosing a different contractor.
c. Most contractors have started to include price escalation clause in fixed fee contracts that attempt to push the risk of increases in labor and material onto the homeowner. Be very wary of these provisions. You need to have an attorney review them.
d. Be very careful with change order and "allowance" items. Change orders are written agreements that added to or take away from the scope of work. Allowances are "placeholder" amounts for certain items of construction or materials that are not certain or fixed when the contract is signed. Normally, the owner will make selections or choices that will finalize or fix those allowance items during construction. These decisions will also affect the final cost of construction.
e. On cost-plus contracts, make sure that the contractor is required to provide all invoices, proof of payment and other backup documentation with each pay application or draw request.
f. One of the most common forms of contractor fraud is when the contractor marks up the cost of construction (labor or materials) and does not disclose this to the homeowner on a cost-plus contract. For instance, we had a contractor that formed a separate company to provide labor to his general contractor company. He would pay his laborers minimum wage, but "charge" this GC company as if he as paying them $75.00/hour. The GC would them submit the "marked up" invoice to the homeowner who would pay it. The contractor then pocketed the mark up of about $65/hour. That is fraud.
Understanding the characteristics and risks of the different types of construction contracts and working with an attorney can help you decide which contract type aligns best with your project goals and risk tolerance.
5. Texas Lien Law and Your Homestead
Texas lien law is particularly important if your remodeling project involves your homestead.
Geneally, contractors and suppliers may have the right to file a lien against your property if they are not paid. Contractors regularly threaten to "lien" your house if you don't pay them. Quite often, these threats are hollow.
This is because Texas law includes specific provisions that protect homesteads. Understanding when a contractor can actually lien your property is important. There are scenarios where a lien could still attach to your property. An attorney can provide crucial advice on complying with notice requirements and other steps to mitigate the risk of liens.
Conclusion
Given the complexities and potential risks involved in home remodeling, consulting with an attorney is a wise step to protect your investment. From contract drafting to understanding insurance and managing lien risks, legal expertise ensures that your remodeling project is built on a solid foundation. Your home is not just your sanctuary; it's a significant financial asset, and safeguarding it should be a top priority.
At Curbside Attorney, we have several affordable packages that can assist you on your home remodeling project and protect you. These include:
Before you begin your next home remodeling project, contact us at Curbside Attorney. We’re here to ensure that your home improvements enhance not only your living space but also your peace of mind. Secure your investment by getting the right legal help today!
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