July 26, 2022

What to look out for when you sign your contractor

Signing the contract with your contractor is a major step in the construction process. You need to make sure that you crossed your t’s dotted your i’s to minimize the risk of additional costs during construction. Just as I’ve shown you what to look out for when you sign with your architect, I’ll show you below what to look out for when you sign with your contractor.

Summary

The risks of a faulty contract

Contractors are highly specialized when it comes to contracts. Chances are they have already built their fair share of buildings and burned their fingers. That’s why they’ll ensure that their contract with the client is as blurry as possible and that the contracts with their subcontractors are watertight. That way, they have the possibility to invoice the client for change orders while simultaneously demanding those services from their subcontractors without additional payment.

What should you include in the contract?

Here are the points that you should definitely include in your contract.

  • Scope of work
  • A list of the documents on which the price is based
  • A list of regulations with which they need to comply
  • Deadlines for the different stages
  • The penalty fee for delays
  • Agreed upon fee/lump sum agreement
  • Payment plan
  • Bill of quantity with pricing
  • Designs on which the price is based
  • Any additional documents that were used to determine the price
  • Cancellation option (I like to work with stages, so after each stage, we can stop the business relationship)
  • Description of the handover and the documents that need to be handed over
  • Guarantees clause
  • Insurance clause
  • Illegal workers clause
  • Clause about handling change orders

How to handle the current economy

With the current economic state, most companies are unwilling to agree upon a lump sum amount. They don’t know what the material prices will be in a couple of weeks, let alone years. That’s why it may be wise to work with a price sliding clause or market index.

The price sliding clause foresees that the prices are adjusted if the material price goes up or down by a certain amount.

The market index shows the current market index for construction cost and can be used in the same way. If the market index increases because of a price increase, the contractor can ask for additional funds. If it goes down, the client has the right to compensation.

You may want to insert a clause stating that this only applies when the differences are more than X% to avoid having to pay more with every minor price increase.

how to negotiate a better deal

The best way to negotiate a better deal is by having multiple offers on the table. We create a price comparison for each trade and each position, allowing us to see where the most significant price differences are. This is then discussed with the contractor, who is often willing to reduce these prices to an average market level. Do this for each trade and when you’re completely done, ask them what kind of discount they are willing to give you.

This will often add up to a much higher price reduction than when you would only ask for a discount, as the smaller items from the previously mentioned step really add up in the end.

what’s next?

In Germany, Lump Sum is not Equal to Lump Sum…

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