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Working with a Contractor: Relationship and Contract Types

Choosing and working with a home improvement contractor is an essential part of completing a project in a way that fulfills your expectations. For a homeowner, having knowledge about the overall process of renovation is just as important as finding and selecting a contractor for your specific project. There are a number of different options available for the way you and your contractor work together.

Types of relationships

The first and most common arrangement is to hire a general contractor. This person has overall responsibility for getting the job done: purchasing supplies, scheduling, finding subcontractors, and doing the “meta-thinking” about the project as a whole.

A design-build arrangement is similar, but involves the homeowner in the planning process in greater depth. As specifications are being drawn up, the homeowner has a voice in determining details, such as the exact location of a door opening or a certain molding profile. Usually, there is a flat fee for design, and at the end of that process, the homeowner and contractor have developed a construction contract. Most homeowners are happy to defer to the contractor for these decisions, but someone who has done a lot of renovations may prefer to have the greater level of input that this arrangement allows.

The third option is for the homeowner to act as the contractor, hiring his or her own carpenters and other subcontractors as well as coordinating the permitting and inspection process. This can be very risky, especially if the homeowner has little or no experience in construction or renovation. A homeowner may not realize or appreciate how difficult it can be to coordinate a project and may not anticipate potential problems, set realistic schedules, or be familiar with building and energy code compliance.

Types of contracts

With a fixed-bid contract—the most common type—the amount that the customer will pay is set forth up front. If the actual price of the project exceeds the contract price, the contractor loses money. If the actual price of the project is lower than the contract price, the contractor makes more money. The benefit of a fixed-bid contract is that the final price is stated up front; the risk is that a contractor may pad the price to account for unknown factors.

A fixed-bid contract may include allowances for purchasing materials. For example, the homeowner will choose kitchen cabinets that cost no more than the specified allowance. The cabinet supplier is paid by the contractor, so if the cabinets exceed the allowance, the homeowner must pay the difference to the contractor.

A time-and-materials contract (also known as cost-plus) involves payments based on work done to reach specific milestones. This allows for more careful monitoring along the way and represents a fairer process, since the price paid is linked to the actual cost of the work. The final price is not guaranteed, although a projected maximum may be stated.

The benefit of this type of contract is transparency: the costs of materials and hours worked are stated openly. The risk is that a contractor could take advantage of the arrangement to bill for hours spent taking long breaks or talking on the phone. A homeowner can minimize this risk by carefully monitoring the project as it moves forward, making sure that its costs stay reasonably close to the contract’s numbers at stated checkpoints.

All contracts will spell out a payment schedule. Payments are usually made based on project benchmarks: demolition, rough inspections, finish work, final inspections. By law, the contractor cannot ask you put down more than 30%, and you should always hold off on the last payment until the final inspection has been completed.

This information is based on BBR's "Working with a Contractor, Part 2" workshop. Our next blog entry will address other legal requirements.