How to understand contractor contracts
As the holiday season moves into full swing, I am finding it easier to focus on the fun things and harder to focus on those that require brain-power. This holds true even for entertainment. For example, I am reading a book that my friend has been raving about, but I told her that I am confused about a character who dies. Apparently, I was more confused than I thought, because there were actually 44 deaths and not just one.
Although it can be tempting to simply brush off the “hard” stuff, when work needs to be done, we don’t have the luxury of choice. The same can be said for contracts. Reading through technical terms of contractor contracts can be daunting and confusing, and can result in serious disputes in the end. Fortunately, Derrick Pei, project manager for Kai Ridge Hawaii Construction Company, offered some advice.
Pei suggests using a standard American Institute of Architects (AIA) contract to protect homeowners. He also recommends listing items out in detail, such as payment terms, and including verbiage regarding retention payments.
“The retention payment is for after the job is completed,” Pei said. “This payment will be released to the contractor after the homeowner is satisfied with the end product.”
Pei also spelled out some common contract types.
GUARANTEED MAXIMUM PRICE
These are considered “client-friendly” models, according to Pei. In these types of contracts, homeowners pay contractors for verified costs but also add in a fixed additional fee, which has a specified maximum amount. “The contractor assumes responsibility for all cost overruns and savings,” Pei said.
Homeowners in this case recognize the level of uncertainty associated with the project and agree to pay not only the verified costs, but also an additional amount for contractor overhead and profit, according to Pei.
“If monitored by client and contractor, this model is fair and equitable for projects with many uncertainties,” he said. “Kai Ridge Hawaii will help you understand better what qualifies as legitimate ‘uncertainties’ and the suitability of this model for you.”
INTEGRATED PROJECT DELIVERY/ALLIANCE (IPD)
In this agreement, owners participate from the onset and are involved throughout the process.
“IPD contracts are unique in welcoming owner’s participation with designers, builders and key stakeholders,” Pei said. “This contract type welcomes full transparency among all of the parties involved.”
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