Every builder uses a different contract. Some very detailed some very simple. The contract depends on how you and the builder detailed out the bid. He has given you the contract as he does it. If you need it different than you have to discuss it with him. This is part of the process, finding a place where you are both happy.

The company I work for has a simple contract layout and usually does not detail out the labor and materials because we almost always do fixed costs bids.

The 10% penalty is because the Contractor has deadlines to pay bills or his costs go up. You cause him to pay more then you pay more.

Is your contract fixed or time and materials?

So what exactly is a time and materials contract?

I think you should do a bit more research and reading here on this site before you sign a contract. If you don't know what time and materials contracts are, then you are not ready to negotiate a building contract.

There are many really well detailed posts here that will explain everything.

Some states have statutes that detail what must be in a construction contract. Check out your state website to see if there is one (often under consumer protection of attorney general).

That said, unless you have experience drafting and negotiating contracts you shouldn't be drafting or negotiating this one. Hire a lawyer. This is likely the most expensive thing you will ever buy. Don't make an expensive mistake.

I also would reconsider this builder. Anyone who would charge a 10% penalty (which is likely illegal many places, btw) is not a person I would do business with.

Where do you go from here? If you decide to go forward with this builder provide the builder's "contract" and all the specs, drawings, etc. to the lawyer and have him draft a contract. Ask him to aim for one that is equitable, not one sided.

Sue36

I am curious. Almost everyone I do business with from my mortgage company to my utility company has a due date and a penalty charge for not paying bills on time. Why would it be illegal?

I have researched and read every contract post (250) over the last week. I just wondered what Jmagill considered a time and materials contract because everyone seems to have a different idea of these contracts. We would never sign a contract without a lawyer reviewing and rewriting (if necessary) the contract, but do not want to engage this lawyer until we have a fairly certain idea of who the builder is going to be and the type of contract Fixed or Cost Plus we are asking the lawyer to write. I realize from reviewing these posts just how catastrophic it can be to not have a clearly defined contract before starting the building project. Thanks for the advice about our state's website.

Time and materials.

Simply put there is no fixed price and you pay the costs of the home as it is built. You take the risk that labor or material prices rise (or lower) during the period of the build.

Trinitybay

Now that I see you have done some research, I am going to ask and explain about something.

How well did you research this builder before you asked him to bid?

I ask this because I think you should have talked to clients walked through homes, asked about contracts and known he was on your short list all before you went to bid.
Discussing all those things first means that you should have a very good basis to now negotiate the kind of contract that you both can live with.

A good contractor will deliver the house you want at the agreed upon price regardless of a well written contract. He will be honest and up front about how he handles change orders and price changes. He will make right his mistakes and be up front about them. All these things are questions I would have asked of previous clients.

My boss has built million dollar homes with no contract at all. Actually we are doing one of those builds right now. A contract is a good thing but there are things that will be more important in the end. A contractor that is ethical and financially viable.

Thank you for the good information you provided above. I agree that in addition to a contract the reputation of a builder is very important.

A Time & Materials contract usually involves a pre-determined rate for labor and would normally be used for projects smaller than a house.

In my experience, the most common contract types for home building are:
1. Fixed Price
2. Cost of the Work Plus a Fee (with or without a Guaranteed Maximum Price or Shared Savings)
3. Construction Manager as Contractor
4. Construction Manager as Adviser
5. Design-Build

Understanding all of them is unnecessary if the project conditions and the parties involved have already determined which one is most appropriate.

So, who are the parties, what is the schedule, and how tight is the budget?

I suspect the 10% charge for late payments is only an interest rate applied until payment is received. It Probably indicates the contractor's inability to finance your project. A contractor who can carry the cost for an additional month will have a greater overhead rate. Counter this requirement with a clause requiring lien releases from the subs.

No. 3 is sometimes called "Construction Manager at Risk".

Thanks Macy. Ours will be a fixed price contract but we have some allowances.

jmagill,
The OP wrote "10% penalty". That is not a standard clause. A standard late payment clause is 1 1/2% per month. That is quite a bit different from 10% lump sum. I have done hundreds of contracts and 1 1/2% per month is the standard. Also, where there is penalty clause you need to be very careful about drafting the language on when it kicks in. I typically add something to the effect that no payment is due until a complete and accurate invoice with all required documentation as requested is received. I can see the OP getting caught where the builder submits an invoice but no documentation, and then they bicker and fight over when the payment is due (days measured from invoice or days measured from when the backup documentation is provided).

sue36

Non standard clause still does not make it illegal.

Contractors and Subs quite often have a 10% price reduction on bills if they are paid by a certain date. They bid based on those prices. This builder is simply making sure he can meet that deadline or the homeowner incurs the added cost.

If a contractor can't float a month's invoice at a 10% interest rate you should find another contractor. This is a house not a porch addition.

"If a contractor can't float a month's invoice at a 10% interest rate you should find another contractor. This is a house not a porch addition."

That statement holds true but that does not address the problem. Every time the contractor incurs that extra 10% or has to pays that bill with their own money then costs are incurred. That escalates the costs of doing business. It is only good business to address these cost cutting measures in the contract. Sorry but just good business to ensure your contract covers these eventualities, it saves the homeowner in the long run.

I'm saying to simply avoid the problem of hiring a contractor with insufficient credit to take advantage of supplier discounts. There are too many reasons for an Owner's payment to be delayed. Credit is the Contractor's problem, not the Owner's.

But the more important issue is that an Owner might be unfairly pushed into paying an invoice that is not properly written or lacks the required lien documentation, etc.

My advice is to not go down that road.

Any standard contract will contain a clause that protects the owner from being forced to pay an improperly prepared contractor invoice within a time limit.

I will eventually get around to listing the other important owner protections.

As a home owner I would negotiate the timing of the invoice, the way the invoice is prepared and the window to pay. Both parties can abuse the situation. You should also have verified what your bank requires and how they will fund these payments.
The bank often (more so these days) wants an onsite verification of work done and materials purchased before they pay draws.

I would not write off a contractor until I had discussed and negotiated these items. These first presented contract is not usually the one I sign.

For a contractor to treat a potential supplier's early payment discount as if it were a penalty for late payment indicates to me that he has little business skill and there is no reason for an Owner (or a bank) to go along with that kind of backward thinking.

If the Contractor's original bid assumed all possible supplier discounts would be available to him, then he should have included the cost of protecting himself from unavoidable payment delays that might eliminate these discounts.

All the Contractor can reasonably ask of an Owner is to pay for the cost of this additional credit if the delay is the Owner's fault and that should be based on a predetermined interest rate on the outstanding amount rather than a onerous penalty. There are simply too many things not under the Owner's control that can delay a payment (for instance, bank inspection and/or approval and sub lien documentation, etc.).

If a Contractor cannot carry the cost of the project for a week or two he should arrange for the Owner to pay the suppliers directly upon delivery of the materials to the project site.

This is not a negotiating point; it is a deal breaker.

What is a deal breaker to you is not to everyone.

As a homeowner if I can get a better deal on my new home by paying my bill to the contractor on time I will take that deal. The GC is just being up front about it instead of building the costs into a higher contract.

I do that every time I pay my propane bill. I get a discount when I pay cash for my vehicle gas.

Sorry, it is just good business to give your customer the best deal you can.

Comparing the contractural relationship of building a house to the purchase of propane at a retail outlet is intentionally specious if not facetious.

Compiling the necessary contractural terms and conditions for an effective project delivery system cannot be culled from common everyday consumer experiences (if it could, it would make my job a lot easier); even with formal training and project experience it is a difficult task because every project is different.

This question comes up so often at the Garden Web that I have finally compiled a rough outline of the important issues normally contained in contract prepared by a design professional for a Fixed Price contract for a normal sized single family house. Keep in mind that standardized contracts are routinely modified for the specific requirements of each project but it helps a lot to start from a document that is professionally organized and tested in the courts.

FIXED PRICE CONTRACT OUTLINE
- The Contract Documents - list of Drawings, Specifications & Addenda, etc.

- Dates of Commencement and Substantial Completion

- Contract Sum - Contract Sum, any Unit Prices, any Allowances, any accepted Alternates, and mark-up an Change orders.

- Payment - timing, payment schedule & prodedures, interest on overdue payments

- Insurance - contractor and owner liability and property insurance - Waivers of subrogation

- General provisions - written modifications, definition of the Work, Intent of the Documents, Ownership and use of documents

- Owner - responsibility for surveys & legal description of site, approvals, easements, assessments, Owner’s right to stop the Work, and Owner’s right to carry out the Work; Owner’s right to perform construction and award separate contracts

- Contractor - Responsibility for: Review of Contract Documents and field conditions, preparation of Construction Schedule, notification to local building authorities, compliance with building regulations, supervision and construction procedures, construction means, methods, techniques, sequences and procedures, coordination of the Work, acts and omissions of the Contractor's employees, Subcontractors and their agents and employees, discipline and good order among the Contractor's employees and others, employment of unfit persons or persons not skilled in tasks assigned, delivery, handling, storage and installation of materials in accordance with manufacturers' instructions, substitutions, warranty, taxes, permits/fees and notices, submittals (shop drawings, product data, samples, etc.), cutting & patching, clean up, Owner access to the Work, and indemnification of Owner, owner’s consultants, agents and employees

- Owner’s Consultant and agent responsibilities

- Changes in the Work - Time adjustments, minor modifications, adjustments for concealed or unknown physical conditions, Change orders

- Time

- Payments and Completion - Applications for payment, materials stored on and off site, title to work, liens, implied acceptance of the work, Substantial Completion defined, Final Payment with release of liens.

- Protection of Persons and Property

- Correction of the Work - during construction period and one year (or more) afterward.

- Miscellaneous Provisions - Assignment of contract, tests and inspections, governing law.

- Termination of the Contract - by owner or contractor.

- Other Terms and Conditions - to be added by the parties.

- Date & signatures of the parties

Neither specious or facetious.

Comparing the payment terms to the scope of the complete contract might.

If you spent less time nit picking "red herring" issues with members and more time trying to help the OP, your lack of knowledge of construction project administration would be more tolerable.

I like to help people here but slogging through the ankle biting trolls like you, Manhattan42 and Creekside isn't worth it.

Macv, you have a wealth of knowledge to offer this forum, but you are not the only one.

I am neither an ankle biter or a troll. I just have a different point of view than you.

I run the office for a GC. I deal daily with lien waivers, contracts, proof of insurance, mortgage company and title company requirements, Workers comp requirements, bid bonds etc. I understand why a CG does certain things. I know what it will cost the homeowner down to the penny when a GC does not have deadlines for payments.

I am a homeowner who has GC'd two of my own home builds. I know what goes into dealing with all aspects of a build from site survey to closing out the mortgage.

If my input has no value for you that don't bother to read or put down me down.

This is not about me.

Ask your boss to explain to you why your company does not include a 10% late payment penalty clause in contracts, then come back and explain it to the OP who needs your help now that everyone has fled this thread and I will no longer put up with people who argue when they should be listening.

Yes, I should sit in the corner and listen. I should not have an opinion, I should not share my experience.

Thank-you for showing me the light.

Don't sit in a corner and pretend to feel sorry for yourself; go ask your boss about contract penalties and learn something.

I already know what my boss feels about contract penalties. He uses them, where and when they are warranted due to the individual properties of the job. Part of my job is billing those contract penalties. No lessons needed on that.

We also sign contracts where we are subject to contract penalties based on time and performance and payments.

Show me a 10% late payment penalty clause in a real contract.

I don't have to. The OP already told us they have one in hand.
Your dislike for the clause does not make it any less real.

Just as I thought.

Macy - Thanks so much for the outline. I will definitely use that to ensure we have everything we need discussed with this builder or any other builder. We will have our lawyer review before we sign anything but I needed a starting place for discussion. This process is so very stressful and I appreciate the help. We lost our home in Hurricane Ike and are living in a rent house across the road from our property. I am also in the process of retiring so there is that added stress. Thanks againg.

Sorry about your loss.

If you want to see the full version of the contract I outlined, you can buy a paper copy of AIA A105 at the link below for $8.00.

There is nothing wrong with crossing out what you don't want and adding supplemental provisions or clarifications on attached sheets as long as they are dated and referenced in the main Agreement. Be sure all parties initial in the margin where changes were made and make three signed copies.

All standard contract forms provide a space for an interest rate to be entered for late payments to the contractor and that should be sufficient for any builder. Adding 10% to the entire bill after 5 days is obviously an onerous penalty and since the builder doesn't get a discount on most of the cost of construction he can't truthfully say it is due to lost supplier discounts. Window suppliers generally require half at the order time and the rest upon delivery. A 10% penalty is a huge red flag and a deal breaker. Be thankful the guy showed his stripes early.

All AIA contracts naturally provide for an architect but that can be modified. I hope you will have someone advising you during the construction phase since even good contractors make mistakes and it is not realistic to ask anyone to put your interests above theirs and building inspectors have no obligation to you to find errors in the work contrary to popular opinion.

An Allowance is like a small Cost Plus contract inside a Fixed Price contract so avoid Allowances if at all possible and make the builder bid as much as possible up front. When you must use them, determine the quantity and general location of the items now (even if in narrative/list form) so the labor/installation price can be included in the base bid and the Allowance will only be for the cost of materials. Listing Unit Costs (like a per s.f. cost for flooring installation) can help too. This is the only time the builder will be motivated to keep the prices down so don't waste that advantage.

The buy-out of an Allowance item should be resolved by Change Order whether it is higher or lower than the Allowance amount since it changes the contract price. I like to add a third option where a full credit is given and the Owner can supply the material. Sometimes this is the only way out of a difficult negotiation with a Sub. If he knows you can walk away he will try harder to please you.

In my opinion a Fixed Price contract with lots of Allowances that include labor is the most lucrative contract type for a builder assuming he can get kick backs from his subs. I even had a contractor ask me for a kick back because he recommended me for the project.

Good luck.

Here is a link that might be useful: AIA A105

I'll wade into these muddy waters for a moment... We considered a fixed price contract and cost plus a fee. We ended up with the fixed price. The builders who bid cost plus had already given us pricing on all the individual elements before we considered the fixed price. The fixed-price builder we chose also broke down the fixed price contract, and we could see how their sub prices compared. Their fixed price included a set GC fee. The bid looked nearly identical to the others we had gotten, except that it was a guaranteed max price. We couldn't "float down" if a price on something came down, but it couldn't go up either. Same allowances in
both sets of contracts. We chose the builder bc we liked him and the contract bc we felt we needed to know costs were not going to spiral out of control. Then we made CERTAIN our contract included all the details of what that fixed price entailed. Fortunately, we had a couple dozen pages of bid specs from our architect. We used a version of the AIA contract that macv recommends, and with all the included detail, it served us well when questions arose. The bid specs being incorporated were what helped the most.

In addition, I couldn't agree more with macv re outside project supervision. Our bank allowed us to use our architect in lieu of bank inspector to sign off on completion at each draw. Our architect just charged us his hourly rate, and he inspected and verified the build for us. It helped us remain confident that all was ok, I'm certain kept the builder from cutting corners, and generally was one of our wisest moves with this build. I think it also kept our architect more interested/involved/available in our project. We know others who used him for just plans and said they never really saw him after that. Our experience couldn't have been more different- he was our rock whenever questions arose or we were worried. The process is stressful enough- find someone to help you through!

Thank you very much for all this helpful information. We certainly have a lot to consider and want to be sure we are as specific as we can be now to avoid conflicts later.

Macy & Niffy,

Thanks for the link and sharing of information. I had gone on the AIA website but their docs were on-demand and I didn't want to fill in the information yet. I ordered the A105 form from BNI tonight.

Sure glad this forum is available when you need practical advice or as I see from posts, a shoulder to cry on.