Construction Loan Center

What Should a Good Contract Include?

Building your dream home from the ground up or gutting your existing home down to the studs and renovating involves a good deal of negotiations with various professionals and companies. You’ll need to have a very clear understanding of the costs involved for the professional services that will be ongoing during construction such as the architect, the engineer and the general contractor.
The last thing you need is for any of the service providers telling you “this was not included in our deal” and that you “need to pay extra for that”. 
Almost invariably there comes a time during construction when you end up asking for a change or an additional item at which time it is very important to have a good understanding of the cost of the extra work and make sure to get a signed “change order” statement to avoid misunderstandings and headaches down the road.   
Guidelines for home construction loans require a borrower to enter into a written contract with a builder/contractor.  In some markets, there is no standard form and the format of the contract can vary, but certain elements must be present regardless of the format, and those elements must be acceptable to construction lender’s underwriting.
A Construction contract is a written agreement between the borrower and the builder for services to be provided by the builder for a stated consideration.

A proper and customary contract contains*:

  • A clear statement of the responsibilities each party will perform.
  • The date of the contract, the scheduled dates for commencement and completion of construction and the date of occupancy.  An event date, rather than the actual date, is sometimes acceptable.
  • The amount the builder is to receive for the construction of the completed home, as well as under what conditions it will be received.  If the property is located in a state that charges sales tax, the contract must specify whether the amount includes state sales tax.
  • Itemized allowance items.
  • Line item cost breakdown.
  • A payment method that is compatible with the line item cost breakdown and the disbursement procedures of the investor.
  • Provisions for possible changes to plans or specifications by appropriate change orders.
  • Full identification of all parties and definition of all names used in the contract (contractor, owner, subcontractors, and architect).
  • Architect's responsibility, if any.
  • Signatures of the borrower and contractor.
  • The property's numerical street address or full legal description.
Construction Loan Center is not in a position to provide legal advice. We strongly recommend you review all legal documents with your attorney.