Home Builder Agreement: What You Need to Know

The agreement between the home builder and the homeowner, sometimes referred to as a building contract or construction agreement, outlines the scope of a construction project. It will set out the rights and obligations of each party , and ensure that everyone is on the same page with respect to costs and time frames. The purpose of the agreement is to protect both the homeowner and the builder from a misunderstanding or dispute arising throughout the course of the project. A solid agreement can save time and money and give all parties peace of mind that their best interests are protected.

Core Components of a Home Builder Agreement

A home builder agreement is a crucial document in the home building process. Home builders and new home buyers should be aware of the important components of this contract. Either party has the right to recover contract damages by taking legal action against the other in the event of a breach of contract. A breach of a builder agreement may involve a negligent or intentional failure to fulfill the obligations of the contract. Home builder agreements should include both parties’ names and contact information, the name of the property owner, a description of the site address or location of the property, the date of the agreement and the date the work is expected to begin and end. The written contract should describe the work that is to be completed, including details such as the number of bedrooms and bathrooms, rooms to be tiled and carpeted, doors to be hung and windows to be installed. Subcontractors who will be used must also be identified. The payment terms must be clearly stated in the agreement, including the total cost and whether the payments will be broken down to cover labor and materials. Many home builders will ask for a small deposit prior to starting the project and then bill for additional materials and labor as the project progresses. A timeline for the project, including when it will start and finish, must also be included in your home builder contract. The average time frame for home completion is six months, although a new home can take anywhere from four to nine months to finish. The estimated date of project completion is usually subject to change in order for the home builder to accommodate time-consuming tasks such as the roof installation, kitchen cabinets and furniture installation.

Regulatory and Legal Compliance

Home builder agreements should be created according to the legal requirements of the governing jurisdiction. Most states have written legislation addressing the home building industry. Contractors are required to be licensed and insured to ensure that the job meets the legal requirements for safety, quality materials and ethical practices. If a home owner hires an unlicensed contractor who fails to comply with the existing laws, the home owner is responsible for any code violations and could also be personally liable for any injuries or damages that occur on the property because of the contractor’s actions.
Similar to employment contracts, generally the contract can be voided by a court of law if it is found that either party violated existing regulatory laws. Some common laws that apply to home builders and contractors include:
Contractors can follow the new home builder agreement for all types of residential construction including new home building, renovations, remodeling and additions.

Issues Often Seen in Home Builder Agreements

It’s not just clients who get taken by surprise when bids come in higher or lower than expected – builders can also get caught out by failing to draft or redraft an effective contract.
A common mistake is failing to include site specifications. Your contract should include at least a brief description of the land and home or, preferably, reference the plans and specifications. Another way to overcome ambiguity is to define terms in the contract. For example, what does the word "landscaping" mean? Does it include trees, shrubs, topsoil, planting beds? If you’re building a home for a client it’s in everyone’s best interest to clearly identify what is included in the scope of work.
Disbursement schedules are another area where care need to be taken. If you’re building a variety of homes you might want to consider a schedule that works for all of them rather than customizing one for each project. A simple schedule listing complete price, deposit, progress payments, adjustment for extras, and match funds. Some builders prefer to have a schedule that includes a revision after the price is established and then clarifies that the overdue payment amount will be updated accordingly – this approach should be documented clearly.
If you won’t have access to all materials before construction starts, consider building into the schedule a list of pre-selected or pre-ordered products – this will give the builder the access they need to complete further work after one stage of construction is completed.
One common pitfall for clients is not employing an experienced real estate lawyer to review the developer’s contract. Often, clients think that they must hire the developer’s lawyer. In fact, the client’s lawyer has full control over the contract because no money changes hands until the client signs.

Provisions Seen in a Home Builder Agreement

Building a new home is an exciting journey, and negotiation is a part of the process. To ensure that you’re getting the most out of your agreement with your home builder, keep the following strategies in mind.

1. Understand the Standard

A standard for a home builder may not be what you consider to be standard. You should know what the builder’s contract contains, along with industry standards, to help you negotiate a better contract. Having a prior idea of what is standard can help protect you legally.

2. Don’t Get Starstruck

Don’t let the thought of a brand new house cloud your judgment. You don’t want to skip over details or not question things out of excitement. It’s important to read every portion of the contract and understand it fully before signing.

3. Be Respectful

There are a number of legal obligations that a home builder has to uphold. This means that you can be somewhere between strict and lenient with your proposed changes. It is best to listen to your builder’s reasoning behind their proposals instead of just insisting on altering them . Many times you will decide to acquiesce to what they believe is best.

4. Carefully Consider the Changes

Be careful about which portions of the contract are the most important to you. You will likely run into some points where a compromise is in both your and the builder’s best interests. The entire negotiation process should be fair to both parties. You can request changes that create a more favorable contract overall.

5. Be Wary of Add-Ons

Sometimes a builder will try to sneak an additional cost into your agreement. For example, they might include a charge for a design review. Make sure you watch out for these small costs unless you have previously discussed them.
Negotiating a new home builder agreement can be stressful, but you don’t have to go through the process alone. Having a real estate lawyer by your side can make for a more pleasant experience. Your attorney will be able to explain any legal terms you don’t understand, as well as offer assistance with negotiation points.

Clarifying the Agreement and Avoiding Ambiguity

Ensuring that there is clarity and transparency in the terms of a home builder agreement is critical to avoiding disputes down the road. Such disputes can result in litigation that is costly and time consuming. Steps can be taken to minimize the possibility of disputes in advance of commencing a home building project.
The first step is to ensure that precise and detailed terms are used in a home builder agreement. Where a term is defined in a home builder agreement, it should be specifically explained so that there is no confusion or question about what the term means.
The next step is to make sure that the agreement is fair. If one party has more power than the other, the agreement terms should support this imbalance. This disbalance may exist because one party has superior bargaining power, because of a perceived status imbalance, or otherwise. Unilateral terms that do not take into account the needs of both parties will result in a level of tension in the performance of the agreement, and can certainly lead to disputes arising.
Another suggestion is to have other provisions in place that require ongoing communication between the parties. It is suggested that an open line of communication is essential for the successful completion of a home building project. Moreover, it should be noted that where appropriate terms are incorporated in the agreement that require the parties to engage in ongoing communication when breaches of the agreement are to be addressed, a court or tribunal is more likely to find that a failure to communicate with the other party prior to the commencement of litigation is in breach of the agreement.
Furthermore, providing details regarding how changes to the agreement (both to the costs and the timelines) are to be handled will serve to avoid disputes. In circumstances where one party wishes to make changes to the timelines, which result in additional costs, the impact of the changes to the agreement should be documented in detail. Where the changes impact the other party, the amount of the additional costs should be set out and the reasons for the changes to the timelines explained. These explanations should also be clear and uncluttered, as detailed explanations usually trump a situation where a "catch-all" reason is provided in an effort to explain a change.
Finally, a party should recognize that reasonable expectations are key to reducing disputes in a home building agreement. By setting out timelines, costs, and requiring communication with the other party, any dispute that arises on the other side can be clawed back to the terms of the agreement.

Addressing Changes and Disputes

When entering into a home builder agreement, the prospect of modifying or disputing the contract is often a concern for homeowners. This concern is specifically addressed in Section 11.0 of the full contract.
Homeowner Concerns
From the perspective of the homeowner, the possibility of disputes and modifications is likely their top concern. Most homeowners want assurance that the home will meet their needs and that any changes will be manageable.
Builder Concerns
From the perspective of the builder, flexibility is key. Most builders want to be able to make modifications without a lot of procedures or extra costs. However, builders are often hesitant to have disputes go directly to court.
Dispute Resolution
The full contract calls for any dispute to be handled through mediation and arbitration. Depending on your state, the language may change slightly but the essence should be the same. Basically if you have a dispute, you must submit it to mediation first, but then you are allowed to take it to arbitration if no resolution is reached.
Modification of the Home Builder Agreement
The contract allows either the homeowner or the builder to make a change to the original terms . If one party wishes to make a modification they must bring it before the other party for their approval. If the parties both agree to a modification of the terms, then the changes will be noted in the contract file. Should the other party not wish to approve the change, it must provide a written notice with reasons for the disapproval. The notice of disapproval must be delivered within 20 working days of receiving the request for modification.
The Homeowner or Builder Can Change Their Mind
If the homeowner makes a change to the home builder agreement but later decides they do not wish to change their mind, they have 20 working days to give notice of the cancellation. As well, the builder can change their mind about a modification they requested. However, the request for cancellation of the modification must be in writing and delivered to the homeowner within 20 working days of being approved.
Compensable Changes
Should there be compensable changes made to the home builder agreement, the homeowner has the right to request a Time Equalization, which means the homeowner has the right to the extra time needed to complete the work.