The greater the cost of a construction project, the greater the need for skilled legal representation to assist the property owner in protecting them from the common pitfalls inherent in engaging a contractor to build a house or building. Legal challenges can surface at any stage of the construction process, including delays, alterations in the scope of work, liens from unpaid subcontractors, or issues with workmanship. Many of these problems can be avoided or reduced by involving legal counsel early on—even before any contract with a general contractor is signed.
Over nearly forty years of my experience with construction cases, the most frequently encountered issue I encountered is a poorly drafted contract or no contract at all. The contract serves as the cornerstone of the relationship between the property owner and the general contractor. Not having a well-drafted contract is almost like building a house without a foundation. A well-drafted contract will clearly define the scope of work, establish the timeline for completion, set standards for the quality of work, and outline the schedule and amounts for payments to the contractor. It should also include a provision outlining how the cost of change orders will be computed, and a provision for mediation and arbitration of disputes, so lengthy legal proceedings can be avoided.
As noted above, a well-written contract will specify how the cost of change orders is calculated, preventing the contractor from charging excessive fees if changes in scope or design occur. Unfortunately, most construction contracts fail to adequately address the pricing of change orders, the property is at the mercy of the contractor not to charge an excessive fee for a change in the scope of the work, changes for unforeseen conditions, or a change in design.
Additionally, effective contracts include provisions that incentivize progress or impose penalties if work does not stay on schedule. They also link progress payments to the contractor with the construction loan draws from the lender.
While many property owners trust their construction lender to safeguard against potential problems, they do so without realizing lenders have no responsibility to protect owners from these issues. Lenders are generally uninterested in finer details of the construction work, such as whether specific items like kitchen cabinetry match the plans and contract, or if the contractor fulfilled the homeowner’s expectations as to the fit and finish of trim and flooding. Inspections performed by lenders are limited to verifying completion of work, not its quality. If an inspector misses a problem, the owner cannot pursue legal action against the inspector due to a lack of contractual relationship with the bank’s inspector
All of these concerns should be addressed before entering into a contract with the builder. However, most property owners seek to minimize costs and therefore forgo legal representation until a dispute actually arises.
When a legal dispute occurs during the project, it can rapidly intensify. This may lead to the filing of liens, subcontractors abandoning the job, and the lender withholding loan draws due to incomplete work or unresolved liens. In some cases, the local building inspector may issue a stop work order, which could result in municipal code violations and legal proceedings.
At this point, property owners may need to consider terminating the contractor and hiring a replacement. This decision should not be made without legal advice, as the process is more complicated than it appears. Proper documentation of completed work, accurate accounting of progress payments, and providing the required notice under the contract and applicable laws are essential. Failing to follow these steps can expose the owner to financial claims from the contractor that may become ongoing burdens.