Construction Deposits and Contracts – What You Need to Know

Starting a construction project is never as easy as it sounds. Many homeowners make the mistake of underestimating all the complications that can arise during a renovation, especially if one chooses an inexperienced or unreliable remodeling/construction company. Of course, this doesn’t mean that you need to be scared and deterred. On the contrary! Whether you are remodeling an existing home or building a new one, it’s important to stay calm, cool and collected.

But in order to do this, you need to be well-prepared beforehand. This means reading all you can about the construction process, from legalities and building codes to materials and design. Being informed is the best way to get prepared, and avoid all potential scammers and amateur contractors.

Some of the common traps that homeowners fall into are agreeing to large deposits and paying in full before work is complete. We want to help homeowners succeed in their construction journeys. So, in this blog post, we will go through the basics of deposits and construction contracts.

At Thomas Custom Builders, we empathize with our clients and fully understand the complications that can come with construction. That is why we try to minimize all risks for our clients and ensure a transparent relationship. When it comes to deposits, we differ from our competitors in that we do not require any construction payments until the work begins.

WHAT SHOULD A CONSTRUCTION CONTRACT INCLUDE?

The construction contract is the most important part of every project. It serves as protection for both you and the builder. The contract sets all the project’s conditions. It includes your expectations, along with the expectations of the construction company.

Therefore, it is crucial that you carefully read every single line of your contract. It’s important to note that the contract must include everything you agreed upon verbally. Also, sometimes scammer companies include terms that can put the homeowner in a tough position, so it’s very important to reread the contract as much as you can before signing.

Also, there are certain clauses every contract should have. To get a better understanding of how a contract should look, read the list below. It includes the most important things that are found in every decent construction contract:

• The contractor’s name, license number, address, and contact information
• The homeowner’s name and contact information
• The address of the property where the project will commence, along with a description of the property as mentioned in the county clerk’s office
• Relevant attachments such as building plans
• The cost along with the type of payment that you agreed upon
• Description of the project and approximate deadline
• Right to withhold payment if the work doesn’t achieve the agreed-upon standards, and the right to stop the project if the homeowner hasn’t been paying installments
• Remedies for breach of contract
• Alternative solutions for unpredictable scenarios and natural disasters
• Required building permits, licensing, and insurance
• The homeowner’s right to inspect the property during construction
• Permission to make changes to the project and the conditions which allow it
• Warranty that will guarantee quality craftsmanship
• Protection from subcontractor liens for the homeowner
• Post-construction procedures like disposing of leftover materials and cleaning the property

DEPOSITS & POSSIBLE RISKY SCENARIOS

Many homeowners don’t know that a lot of companies require deposits before construction starts. The amount is written in the contract and it can vary from 5% to 30%, depending on the state you live in. But unless you are completely sure of the company’s expertise and reputation, a general rule of thumb is to avoid construction companies that ask for over 10% of the contract sum. The main reason is that scammers can sometimes take the deposit and leave you with unfulfilled dreams and a hole in your pocket.  

For example, with forward claiming, the construction company will give you progress claims for work that hasn’t even started yet. You will pay for all the work that follows before it starts. The company can then go into liquidation and leave you with a project that is 30% complete but 70% paid for.

At Thomas Custom Builders, there is no deposit required. We send our invoices only after the work is completed. This way, you won’t have to pay for materials that haven’t arrived or for work that hasn’t even begun. You will enjoy the project without worrying about where your money goes or whether a task will be completed on time and within budget. Please note that this rule may not apply in situations where you order custom materials with long lead times, for example, windows, appliances, cabinetry, etc.

Additionally, it is easy to get into a never-ending circle of extra costs. Some companies depend on change orders to survive which means you end up paying well over the price you agreed upon in the beginning.

At Thomas Custom Builders, we produce a Guaranteed Maximum Price (GMP) for your project. You will only receive a change order if concealed or unforeseen conditions are discovered or if you change the scope of the project. We do not spend your money, only you can spend your money.

PRO TIPS: HOW TO AVOID RISKS AND SCAMS

Besides required deposits that go beyond 10%, many other signs point to the unpleasant fact that the company you chose is fraudulent. Some signs that are worth mentioning are: requiring cash payments (especially if it’s in advance), no company address, no license and insurance, no contract, unrealistically low bids, limited-time offers, using materials from the contractor’s previous projects, answers that are not straightforward, low-quality or outdated equipment, and too many excuses.

Another one to look out for is if the prime contractor doesn’t want to share the list of subcontractors with you. The clients should know all the subcontractors involved so they can check if everybody has been paid before submitting the last payment themselves. If the contract doesn’t mention that the homeowner is not responsible for subcontractor liens, and if the subcontractors don’t get paid by the main company, you, as a homeowner, may be held responsible in the end.

As we saw, there are a lot of risks involved in construction projects. However, you can take extra steps to ensure that the company you choose is legitimate, transparent, and good-hearted. Here are some pro tips for avoiding risks and scams that will be of immense use when you are hunting for your next contractors:

• Research the contractors online. Find out everything you can and don’t shy away from contacting their previous clients.
• Verify the contractor’s license through License Lookup
• Choose companies with more experience and completed projects. In order to cover their tracks, scammers open and close different companies all the time. If the company exists for 10+ years and has a record of satisfied clients, you are probably good to go!
• Insist on a written contract and consult a legal expert if necessary. Make sure that everything you agreed upon beforehand is mentioned in the contract.
• Ask for referrals from friends and family you trust
• Schedule a consultation in your home to meet the contractor in person
• Get estimates from at least 3 companies and compare them
• Don’t rely on verbal agreements, get everything in writing!
• Don’t hire door-to-door contractors and be wary of contractors that pop up after natural disasters, asking for upfront payments
• Trust your instincts! Observe how the company is communicating with you. It’s never good if a contractor is avoiding meetings and phone calls, is giving confusing answers to simple questions, isn’t paying attention to your needs, and is switching scenarios and plans last minute.
• Don’t pay in full until the project is 100% completed 
• Insist on obtaining building permits. Some scammer contractors avoid getting into the building permit process to cover their tracks more easily.

 WHAT SHOULD I EXPECT AFTER SIGNING?

After you carefully reread the contract at least 3 times and if everything is honest, transparent and as promised, you can sign the contract. After this part of the process, “the real” construction work begins. The builder can start confirming building permits, hiring appropriate subcontractors, organizing transport of materials, and preparing the site for construction. This is our favorite part of the construction project because we can finally get down to work and because you can feel the excitement in the air.  

Contact Thomas Custom Builders if you have questions, or if you want to schedule a consultation to get a quote from us. We are a fully licensed and experienced design-build company that loves helping homeowners create their dream home!