A comprehensive contract will ensure the work is done on time and on budget and will provide a warranty to cover issues down the road. Here are five important considerations:
1. Who is responsible for creating the contract?
Typically, most contractors will prepare a standard contract for your review and signature. However, if you’re working on a smaller job the contractor may not offer one. You can create your own from a template, but this is not advised as it may omit key clauses that protect your interests.
2. There are two basic types of contracts and each has its own set of Pros and Cons.
Fixed Price Contract.
A fixed-price proposal, also known as a bid, guarantees that a specific amount of work will be accomplished for a specific price. The cost will not exceed the agreed-upon price unless work is added, subtracted or changed. Those costs would be documented in a ‘Change Order’, which shows the change in cost to the original fixed price contract. However, excessive focus on maintaining a fixed price may come at the expense of quality, creativity and timeliness.
Cost-Plus Contract (aka Time & Materials contract).
In this version the contractor does not mark-up his labour or material costs. Above their actual costs they are paid a flat fee, which represents their profit on the job. The price of a cost-plus contract will come not as a bid but as an estimate that will detail, by line item, all of the tasks associated with the project. This line-by-line detail makes it easy to compare estimates of different companies. But because cost-plus contracts do not have a fixed total price, they can lead to cost overruns, particularly if the work performed is not closely monitored.
3. What to include in your contract?
The Canadian Home Builders Association provides helpful advice on what the contract should include for a significant renovation, including:
Includes full name, business name, contact information, business registration and insurance certificate numbers.
This can include managing all subcontractors and permits, as well as specifying their working hours and days, etc.
It describes what is covered and for how long. It should specify your protection in the event of poor workmanship, faulty materials or other issues. It should also include a statement that the contractor will hand over manufacturers’ product warranties to you upon completion of work.
A schedule is much more than just a start and end date. It captures the sequence of events and the interdependencies of tasks. For example, on a kitchen reno, the cabinet millwork leadtime determines the installation start date and sub-trades need to be scheduled in quick succession. Any delay will have a ripple effect on other sub-trades. A good schedule tells you what days and times workers will be on site.
4. The contract should include a detailed budget and how/when payment will be made.
Method of payment
Cash, cheque or credit card? A 2010 survey by the Ontario Home Builders’ Association found that 56 per cent of homeowners admitted to paying cash ‘under the table’ for a job. While this can avoid paying HST, there is no paper trail, which brings the risk of poor workmanship, no warranty, liability issues and tax issues with Canada Revenue Agency.
Payment should be scheduled based on completed work and deposits should be kept to a minimum. According to television personality and professional contractor, Mike Holmes, an initial deposit of 10% is adequate for most jobs.
Put aside 10 to 15 per cent of the budget as a contingency for any expected expenses that may arise along the way – particularly if it’s an older home that has experienced more wear and tear. Also it’s not uncommon for homeowners to decide mid-project to add various upgrades during the renovation process, so a contingency fund is helpful to have.
A holdback provides the homeowner with leverage at the end of a job to ensure the job is completely finished to their satisfaction. It is also required in most provinces to protect the homeowner against subcontractors who may place a lien on the property in the event the General Contractor doesn’t pay them. On each payment you make to your renovator, you should hold back a certain percentage for a specified length of time.
5. Finally, who should review it?
Depending on the value or complexity of the contract, it may need to be reviewed by your lawyer. Ultimately, the contract should not be signed unless you understand and agree with all the terms and conditions.
About our Survival Guide
Home renovations, whether upgrades, repairs or new construction, are a reality most homeowners face at some point in their lives. While there often seems to be an endless supply of independent contractors or companies available to do the work, finding the best one for the job can often pose a challenge. Although online resources exist for homeowners, there has yet to one that addresses the entire process from start to finish. So the experts at HomeStars have developed a comprehensive guide to help homeowners along every step of the way.