Guidelines for Residential Construction
Building or remodeling a home is a large financial and emotional undertaking whether you are building your dream home or rebuilding your home after the devastating San Diego fires. Everyone has heard horror stories of homeowners being taken advantage of by unscrupulous or inexperienced contractors. The process is complicated and even if you hire a reputable contractor there can be delays, cost overruns and litigation. After years of representing homeowners, contractors and material suppliers, McCullogh and Associates knows that it is better to prevent future problems then to allow problems to develop resulting in costly litigation, a delayed construction project and cost overruns. Problems can be avoided by thoroughly investigating potential contractors, careful drafting and review of written contracts and using sound oversight procedures during construction.

McCullogh and Associates recommends that any homeowner taking on the challenge of building, rebuilding or remodeling their home consult with an experienced attorney. What follows is a general overview of what a homeowner should do when building, rebuilding or remodeling their home.

Hiring an Architect or Designer
A homeowner should use the same due diligence in hiring an architect or designer that he does in hiring a contractor.

  1. Only Hire Licensed Architects or Experienced Designers. A designer may legally prepare drawings and plans for single family dwellings of wood frame construction not more than two stories and basement in height. If your project falls within the definition of Business and Profession Code Section 5537 and you may use an architect or a designer. Whether you select an architect or designer is based upon your own personal preference. A designer is almost always less expensive than an architect.

    A homeowner may verify that a person is a licensed architect by performing a licensee search at the California Architects Board Website at www.cab.ca.gov. This database lists all currently licensed individuals. Unlicensed individuals or architects whose licenses are delinquent, expired, suspended or revoked are not listed in the database.
  2. Research the Qualifications and Experience of Your Architect or Designer. If you plan to hire a licensed architect, verify the architect�s licensing status at the California Architects Board website (www.cab.ca.gov). Obtain references from the architect or designer and contact at least five references. It may be helpful to view the architect or designer�s prior projects. Research whether the architect or designer has been a party to current or prior litigation. Most California Superior Courts allow you to perform searches by party name of past and current lawsuits. The Superior Court of California, County of San Diego website (www.sdcourt.ca.gov) has a Court Index Inquiry. Search by the architect or designer�s firm name and individual name. Just because an architect or designer has been a party to a lawsuit does not mean that they are not qualified. If the architect or designer has been a party to a lawsuit, discuss your findings with the architect or designer and if the lawsuit involves a homeowner complaint, contact the homeowner.
  3. Sign a Written Contract Before the Architect or Designer Commences Work. Licensed architects are required to have a written contract setting forth a description of services to be provided by the architect to the client, a description of any basis of compensation applicable to the contract and method of payment, the name, address, and license number of the architect and the client, a description of the procedure that the architect and client will use to accommodate additional services and a description of the procedure to be used by either party to terminate the contract. California Business and Professions Code Section 5536.22.

    Whether using an architect or designer, the written contract should include the following:
    1. Name and address of architect/designer and if a licensed architect, the license number;
    2. Detailed scope of work. The design process is generally divided into four phases, the schematic design phase, design development phase, construction drawings phase and construction administration phase. When interviewing and receiving bids from architects and designers make sure that the architect or designer provides you with the total cost to complete all phases that will result in complete construction drawings. Construction drawings are needed to obtain building permits and it is the construction drawings that are used to obtain bids from contractors. Many homeowners are given a quote through the design development phase and assume that the floor plans, elevations and preliminary plans prepared at this stage are in fact construction drawings. They are shocked when the are told that the previously quoted contract price does not include construction drawings and that construction drawings will be a separate and often sizeable charge.

      An architect and designer may also offer his or her services for construction administration. This is not required, but may be desired. If you retain an architect or designer to perform construction administration make sure you have a written contract setting forth the scope of construction administrative services and how the architect will charge for those services. Construction administrative services can be charged based upon a percentage of the overall cost of construction or on an hourly basis.
    3. The contract should include an estimated cost for actual construction to ensure that the plans prepared by the architect or designer can be built within the homeowner�s budget. It is not uncommon for the homeowner to get caught up in designing the home and request numerous changes and upgrades that the homeowner cannot afford. It is important to clearly communicate and put in writing that the architect or designer will be preparing plans that can be built within a specified budget.
    4. The contract should set out the time to complete each phase of the design process and set forth a liquidated damages provision if the deadlines are not met.
    5. The contract should include an attorneys� fee provision that provides that if either party files a lawsuit to enforce the terms of the contract, the prevailing party is entitled to recover reasonable attorneys� fees and costs.

Bidding the Construction Project
To obtain the best price, the homeowner should obtain at least three (3) bids from qualified contractors. Contractors submit a bid based upon a review of the construction drawings. It is recommended that the homeowner also prepare a separate document entitled, �Instructions to Bidders� outlining any special requirements the contractor should follow when submitting its bid. The Instructions to Bidders should address the format a contractor must use when submitting its response to the bid. If all contractors use a similar format it makes it easier to compare bids.

For example, unless your construction plans are extremely detailed, contractors cannot give set prices for finish items such as appliances, lighting and plumbing fixtures, flooring and cabinets. Instead of giving a fixed price for these items an amount of money is assigned to a specific category which is referred to as an �allowance.� If the actual amount spent for that item, for example cabinets, is less than the allowance, the homeowner receives the difference. If the actual amount spent for that item is more than the allowance, the homeowner must pay the extra amount plus the agreed upon contractor profit and overhead. When comparing contracts or bids, it is important to look beyond the total contract amount and compare allowance items. One bid may be substantially lower than the other, but that it may be because the allowance items are unreasonably low. In reality the actual amount paid by the homeowner will be substantially more because the homeowner is responsible to pay costs that exceed the allowance amount.

Categories which are not allowance items are fixed price. This means that if the contractor spends less than the fixed price amount, he keeps the difference. However, if the actual cost is more that the fixed price amount, the contractor is responsible to pay the overage. If the homeowner has determined that he wants specific finish items like types of appliances, lighting fixtures, cabinets these can be called out specifically in the Instructions to Bidders and the contractor can submit a fixed price bid for these items.

A homeowner should request that the contractor�s bid include a schedule of values. A schedule of values is a breakdown of the total construction contract amount broken into categories such as framing, grading, foundation, rough plumbing, rough electrical, drywall, roof, finish electrical, appliances, contractor profit and overhead, etc. The schedule of values should be part of the bid submittal to allow the homeowner to compare contractor�s bids.

As part of the bid process, a homeowner should also require that a contractor submit proof of insurance. A general contractor should have, at a minimum, a commercial general liability policy with limits of coverage of $1,000,000.00 or more. If the contractor has employees, the contractor should also have a workers compensation policy with coverage of $1,000,000.00 per occurrence.

Hiring a Contractor

  1. Only Hire Licensed Contractors. A homeowner should only hire a licensed general contractor. A contractor�s license status may be verified by a search on the California Contractors State License Board�s website (www.cslb.ca.gov). You may search by contractor license number, contractor name or personnel name. The Contractors State License Board website will indicate if the contractor is licensed, the type of license, whether the license is active, whether the contractor has prior disciplinary action against it and identify the contractor�s license bond surety and workers compensation carrier and if the contractor is required to have workers compensation insurance.
  2. Investigate Potential Contractors The homeowner should thoroughly investigate potential contractors, preferably before the bid process. This includes verifying the contractor�s license status, obtaining and contacting references and determining if the contractor has been involved in past or present litigation. It is also advisable to view the contractor�s prior projects. Most California County Court websites allow you to perform searches of past and current lawsuits by party name. The Superior Court of California, County of San Diego website (www.sdcourt.ca.gov) has a Court Index Inquiry.
  3. Obtain At Least Three (3) Bids From Licensed Contractors. It is best to select your contractor after you have reviewed numerous bids and performed your investigation. A decision made after a review of the bids and an investigation of contractors is an informed decision. It is much more difficult to negotiate price or deal with background issues if the homeowner and contractor already have a written contract.
  4. Sign A Written Contract Before Work Commences. A contract governs the relationship between homeowner and contractor and how the contractor will charge the homeowner for work performed. A homeowner is in a better bargaining position if the contract terms are decided before work commences. After work commences it becomes much more difficult to negotiate price , define the scope of work and terminate an uncooperative contractor.
  5. The Written Construction Contract Should Contain Key Provisions. A licensed contractor is required to enter into a written contract. The California Business and Professions Code sets forth specific requirements for items that must be included in a construction contract. This is the obligation of a contractor. For the homeowner�s protection, the following items should be included (these items may be duplicative of the requirements of the Business and Professions Code):
    1. Contractor�s name, address and license number;
    2. Detailed scope of work. ( It is best if a schedule of values is attached to the contract and made an exhibit.);
    3. A fixed price to complete construction.
    4. Time to complete construction and a liquidated damages provision for each day construction is not completed after deadline. The time to complete construction should include both a start date and a total number of days to complete the project.
    5. A procedure for change orders. The contract should require that all changes to the scope of work, cost of construction and time to complete must be in writing signed by the homeowner and contractor.
    6. 10% Retention. The contract should require that 10% of all payments to the contractor be withheld until the project is complete. This is often referred to as a �retention.�
  6. Attorneys� Fee Provision The contract should contain an attorneys� fee provision that provides that if any party files a lawsuit to enforce the terms of the construction contract that the prevailing party is awarded reasonable attorneys fees and costs.
  7. Fund Control Plan. The contract should have a detailed procedure for submitting pay requests and making payments under the construction contract. Fund controls are discussed in more detail below.
  8. Provision for Termination for Convenience by Owner. This provision allows a homeowner to legally discharge a contract or without cause. Without such a provision a homeowner may find it difficult and legally risky to discharge a problem contractor.
  9. Homeowner Should Be Listed As Additional Insured on Contractor�s Insurance Policies. The contract should require that the homeowner be added as an additional named insured on contractor�s commercial general liability and workers compensation policies (if applicable). As stated earlier, at the bid phase the homeowner should request that all contractors produce proof of insurance. Once the contractor is selected and the contract is signed it is not enough that a contractor represents that the homeowner has been added as an additional named insured.

    The homeowner should request that contractor provide the homeowner with written verification, usually in the form of an Accord Form, listing homeowner as an additional named insured. The homeowner should have an experienced attorney review the written construction contact prior to signing. An experienced attorney can help the homeowner spot problems and ensure that the homeowner�s interests are protected before a problem arises. It is much less expensive to pay an attorney to review and revise a construction contract than to hire an attorney to rectify a problem that occurs once construction begins.

Fund Control
A fund control is a procedure to make sure that before a contractor is paid for monthly progress payments that the work billed for has been completed and that the contractor uses the money it receives for the project to pay the subcontractors and material suppliers for that project. The homeowner can manage the fund control or the homeowner may hire a company specializing in fund control. All fund control companies are required to be licensed by the State of California.

Many banks and lenders require its borrowers to use a fund control with a pre-established fund control procedure. However, insurance companies do not often require a fund control procedure or the use of a fund control company. Insurance companies will issue a check to its insured. It is the insured/homeowner who is responsible for making payments to the contractor and ensuring that the contractor properly applies funds and performs the work for which it bills. It is not uncommon for contractors to front load their monthly pay requests (that is to bill for work not completed) or not pay subcontractors and material suppliers.

Contractors usually submit monthly bills. These are called monthly progress payment requests. Like the name suggests, the contractor bills for the �progress� it has made to date on the construction project. The issue is how does a homeowner verify the contractor�s progress. This can be very difficult, especially for an inexperienced homeowner.

If a contractor submits a monthly progress payment request indicating that the project is 25% complete, how can a homeowner know if this is correct? The best tool to track contractor billing is a schedule of values. This schedule of values is a breakdown of the total construction contract amount broken down in to categories such as framing, grading, foundation, rough plumbing, rough electrical, drywall, roof, finish electrical, appliances, contractor profit and overhead, etc. The schedule of values is prepared by the contractor and it should be submitted at the time the contractor bids the project. The schedule of values should also be made part of the construction contact.

When the contractor submits its monthly progress payment request the request should be accompanied by a revised schedule of values. Each schedule of values should indicate the total amount billed to each category and the percentage of completion plus the amount billed for that monthly progress billing request and revised percentage of completion. It is easier to determine if framing is 25% complete than it is to determine if the entire project is 10% complete.

Using a fund control and fund control procedure is the best method to ensure that a contractor is paying project subcontractors and material suppliers. A good fund control procedure requires that a contractor obtain signed lien releases from subcontractors and material suppliers as a condition of receiving monthly progress payments.

If a contractor does not pay its subcontractors and material suppliers the unpaid subcontractors and material suppliers may record mechanic�s liens against the homeowner�s property. The homeowner is legally responsible to pay the subcontractors and material suppliers (assuming they have complied with the procedural requirements and have a valid claim) even if the homeowner previously paid the contractor for the services or materials which are the subject of the mechanic�s lien.

Using joint checks or direct payments to subcontractors and material suppliers is another method to ensure subcontractors and material suppliers are paid. However, a signed lien release should be obtained from the material supplier or subcontractor before a direct or joint check is issued.

DO NOT PAY THE CONTRACTOR IN ADVANCE FOR WORK NOT PERFORMED. Not only is it unwise to pay a contractor for work not performed, including deposits, it is a violation of California contracting law to pay a contractor a large down payment. California Business and Professions Code Section 7151.2(3) limits the amount a contractor may charge for a down payment. The down payment may not exceed one thousand dollars ($1,000.00) or 10% of the contract amount, whichever is less. (California Business and Professions Code Section 7151.2(3)).

The written construction contract and fund control agreement should require that 10% of all monthly progress payments are withheld as a retention. The retention is then paid to the contractor upon final completion of the project. The retention is a safeguard for the homeowner. If there is a problem with the project the homeowner may use the withheld retention funds to fix any problems or complete unfinished work.

Notice of Completion
Once the project is complete the homeowner should record a Notice of Completion. The Notice of Completion is recorded with the recorder�s office for the county where the property is located.

The time limit for recording mechanic�s liens is triggered by recording a Notice of Completion. Subcontractors and material suppliers must record their mechanic�s liens within thirty (30) days after recordation of a Notice of Completion or Notice of Cessation. If no Notice of Completion is recorded, a subcontractor or material supplier has ninety (90) days after completion of the work of improvement to record a mechanic�s lien. (California Civil Code Section 3116.)

The original contractor has sixty (60) days after recordation of a Notice of Completion or Notice of Cessation to record its mechanic�s lien. If no Mechanic�s Lien or Notice of Cessation is recorded, the original contractor has ninety (90) days after the completion of the work of improvement to record its mechanic�s lien. (California Civil Code Section 3115).

Problems During Design and Construction

During the design and construction phases numerous problems can and most likely will arise. Some of these problems may resolve informally between the homeowner and the architect/designer or the homeowner and the contractor. Informal resolution is more likely if the homeowner has entered into a detailed written contract that governs the relationship between the parties, if problems are caught early and the parties openly discuss issues and problems.

For situations in which informal resolution is not possible it is very important for the homeowner to get competent legal advise as soon as possible. Problems that are ignored or put off can result in increased design or construction costs, abandonment of the project by the contractor, a depletion of the homeowner�s funds and delay in construction.

It is also important that the homeowner document all communications with the architect/designer or contractor in writing. This has become much easier with the widespread use of email. All communication should be saved for future reference.

Conclusion
Thorough investigation, knowledge of the construction process and a good written contract are key elements of a successful construction project. This article provides the basic framework to ensure a successful construction project. When problems arise an experienced construction law attorney can help put the construction project on track.



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