So, you’ve decided to take on a home renovation. You’ve determined what renovations you want done and landed on a rough budget. You’ve also started looking for contractors, but you’re having trouble deciding which ones are right for your renovation, even though you’ve done your due diligence getting recommendations and thoroughly interviewed possible candidates.
During this process, you might find that some – even highly recommended – contractors will want to form a verbal, cash deal with you. If, by instinct, that makes you feel uncomfortable, it’s probably because verbal contracts can be a red flag when it comes to the overall professionalism of that contractor. No matter the size or complexity of your renovation, you don’t want to be left high and dry should something go wrong during your project. And the best way to combat any misunderstandings is to lay out the scope of your project in writing before the project begins.
In this blog post, we break down why getting a written renovation contract from your contractor is so important and what to include in the contract, so that you and your family are protected if things go sideways.
What is a contract?
A contract is a legal agreement between you and the company you hire to do your renovation. It sets out the roles and responsibilities of both parties in relation to the project, and it protects both parties’ interests. Professional contractors and smart homeowners always work with a written contract that includes a detailed project plan and specifies exactly what you and your contractor have agreed to. A contract is the best way to protect yourself and to ensure things go as planned — in fact, it’s a valuable part of what a professional contractor provides.
What goes into a contract?
The scope of your project can help you determine what kind of contract you’ll need. For minor home repair, like replacing a kitchen faucet, a simple work order may be adequate. This would include the name and address of the company doing the work, your name and address, a brief description of the work being done, the cost, and when payment is due. This doesn’t need to be more than a page long.
For more substantial repairs, such as roof re-shingling, you’ll want additional details on the materials to be used, such as brand and product specifications, and the contractor’s warranty.
For complex repairs and larger renovations, the contract can become lengthy and will need to include full plans and specifications.
To help you navigate what should be included in a renovation contract, download A Homeowner Guide to Renovation Contracts.
Developing a complete contract
What makes for a good contract? Well, a good contract provides full information on what is to be done, how and when it will be done, the cost and payments required, and the warranty provided. It clearly defines all aspects of the business relationship between you and your contractor in relation to the project.
A good contract treats both parties fairly. You get assurance that you’ll get what you agreed to, on the agreed schedule, and at the agreed price. The contractor gets their obligations clearly spelled out, and assurance that you will pay in full and on time.
Most often, once you and your contractor have reached an agreement on what is to be done and want to proceed with the project, your contractor will prepare a standard draft contract for you to review. Review this document carefully to ensure it accurately reflects what you want and have agreed to.
If your project is high value or complex, you may want a lawyer to review the draft contract.
If you don’t agree with or understand aspects of the draft contract, or if details are missing, don’t sign it. Discuss and resolve these issues with the contractor and have the contract amended as needed before you sign. Remember, once you and your contractor sign the contract, its terms are legally binding on both of you.
Essential contract information
Most contracts include two kinds of information. First, the contract defines what you and the contractor have agreed to. This includes basic information such as:
- who the contractor is
- what the contractor is responsible for doing, what work you will do yourself or have another contractor do
- if sub-contractors will be used, who is responsible for hiring them, paying them and ensuring their work is done properly
- who is responsible for obtaining necessary building permits and inspections
- when the work will be done (start and estimated completion dates)
- how much you will pay the contractor for the work
- when payments are to be made
- what warranty the contractor provides for the work
Second, the contract sets out basic business requirements the contractor must meet to protect in the event of an accident and comply with the laws in your province. To do this, the contract should specify that your contractor:
- has adequate business liability insurance
- is enrolled in your province’s Workers’ Compensation program, or if exempt, has provided documentation proving this exemption
- agrees to payment holdbacks in accordance with your province’s lien legislation
- has a Business or GST/HST Number
- is bonded if your province requires bonding
- has a license number if your municipality requires contractors to be licensed
The contractor should also warrant that any sub-contractor they engage to work on your project will also meet these business requirements.
Disputes and defaults
What about disputes between you and the contractor? For construction and larger renovation projects, contracts commonly specify that mediation or third-party arbitration is required when disputes cannot be resolved.
It is also common for contracts to include provisions that allow either party to be released from the contract if the other party defaults in specific ways. For example, the contractor defaults if he or she declares bankruptcy or abandons your project. Similarly, you default if you declare bankruptcy or fail to pay the contractor.
How prices are determined
Contractors typically use one of four methods to set the price of a project. The method used for your project should be clearly laid out in your contract.
Each method is suited to a particular type of work. On larger projects, there may be one contract between the owner and the person who is doing the construction (the contractor), and a second (separate) contract between the owner and the person who is doing the design work (an architect or designer).
Fixed Price Contracts
A Fixed-Price Contract (also called a Lump Sum Contract) sets out the total price for the work, including all labour, materials, sub-contractor labour, equipment rentals and other expenses. Taxes are either included in this price or additional to it — this must be clearly stated. Fixed-Price Contracts are suited to small repair or renovation projects that are straightforward and easy to plan. Any changes or adjustments to a fixed-price contract requires a written Change Order signed by both parties.
A Cost-Plus Contract is based on the cost actually paid for labour, subcontracted services, materials, and other direct expenses, plus a fee to cover the contractor’s time managing and coordinating all aspects of the project. The fee can be either a fixed amount or a percentage of the costs. A Cost-Plus Contract is often used in larger renovation projects when the exact extent of the work to be done cannot be accurately determined in advance. The project budget set out in the contract should provide estimated costs for major elements of the work. To ensure that the project costs are kept under control, a maximum budget can also be set out in the contract.
A Design-Build Contract is a variation on either a Fixed-Price or Cost-Plus contract. The distinguishing feature of a Design-Build Contract is this: instead of the owner signing one contract for design and a separate contract for construction, the whole project is covered in a single document. One firm designs and builds the project. This approach is most common with custom home construction and large-scale renovations. For example, architects often manage an entire custom home project, designing the home and then hiring contractors to build it. Most often, design-build management fees are a percentage of all costs.
Unit Price Contracts
A Unit Price Contract is based on a given rate per unit of measurement. For example, backfill or decorative stone can be charged by cubic meter or by area.
To learn more about renovation contracts, check out this resource from RenoMark. For information on a variety of renovation topics, visit CHBA’s website.