Webinar Recap: Pre-Construction Best Practices and Lien Overview

Housing construction and remodels are still going strong as we continue to spend an inordinate amount of time at home thanks to COVID-19. In our latest webinar, we asked our newest partner, Robert Maxwell, to share pre-construction tips and advice for contractors and owners. The focus is on residential property, though some concepts apply to commercial real estate.

Types of Construction Contracts

It all starts with the contract. There are predominantly two types of construction contracts seen on residential construction: fixed price and cost plus a fee. 

• Fixed Price: The total amount for the scope is agreed to in advance; actual costs are not disclosed to the client. This type of contract is most common for specialty builders or repeatable projects. The risk to the contractor is that changes to scope increase actual costs. It requires a high level of due diligence by the property owner and careful factoring of potential cost impacts by the contractor, who should keep detailed records in case of litigation or disputes, and to determine project profitability.

• Cost Plus a Fee: The owner pays all contractor's costs plus an agreed-upon fee, usually a percentage of costs. Costs are estimated based on actual costs of labor and materials. The owner agrees to pay for the actual expenses, which may be higher or lower than estimated. In some cases, the owner and contractor agree to a maximum fee value. This kind of contract requires attention to estimates, timelines, allowances and scope; changes in scope must be covered in a formal change order

Best Practices for Contractors Before Selecting a Project

Pre-construction is the most critical phase of a project and a solid pre-construction agreement is crucial to avoiding disputes and litigation down the line. A good contract sets expectations for all parties involved.

What should be clearly defined in a contractor’s construction contract?

• Clearly and concisely defined scope

• Design decisions and drawings (make sure they are attached)

• Environmental studies

• Engineering

• Permitting acquisitions and timeframe

• Contract protection clauses outlining the handling of disputes and remedies

• Project schedule

• Costs

Five important statements and clauses to include are:

1. Disclosure Statement (RCW 18.27.114), which should be signed before work begins. This is a frequent defense to flied liens. Best practice is to include it in the contract .

2. Notice Clause, which establishes how and when the contractor communicates delays to the owner. This is vital when seeking financial compensation for a delay claim.

3. Correction of Work Clause states how disputes will be handled. Best practice for a contractor is to retrain control over remedy on corrections.  

4. Sales Tax Provision (RCW 82.08.50) clearly defines whether the contract price includes sales tax. If this is not stated, the presumption is that the owner must pay the contract price plus sales tax. This is often a surprise to clients, so stating it clearly in the contract avoids sticker shock and disputes.

5. Warranty Clause that specifies the scope and period of the warranty and time limitations on claims. 

The Washington State Bar’s construction section offers baseline contracts that can be adapted to your specific project.

Best Practices for Owners Prior to Selecting a Contractor

Pre-construction is also a critical time for property owners. Here's our checklist for selecting a general contractor:

• Vet each contractor.

  • Who is the company owner and leadership?

  • What are their past projects?

  • What is the company’s business history (searchable at the Washington State Department of Labor & Industries website)?

• Review covenants, conditions and restrictions within your neighborhood/HOA and municipality.

• Communicate with your neighbors about your upcoming project, review boundary lines and to check out potential contractors. Learn more about boundary line disputes.

• Ask for a contract. Unless it's an emergency, always get a formal contract that outlines the scope of work, construction plans and design drawing, timelines and cost estimates; and includes the proper documents.

• Make sure you understand and follow the  notice provisions. Particularly important with change orders during the process.

Lien Dispute Overview 

If despite best efforts to the contrary, the contractor deems it necessary to hold the owner liable for costs, a lien may be filed. Contractors must provide sufficient pre-lien notice to owners. These notices and disclosures should be included in the pre-construction agreement:

• Notice to Owner: RCW 60.06.031 outlines who gets the notice and how it’s sent.

• Disclosure Statement: RCW 18.27.114 – codified version of the disclosure statement and outlines who receives the same.

• Lien Recorded and Filed (RCW 60.06.091) covers the process and timeline for beginning the process.

• Lien Foreclosure / Breach of Contract (RCW 60.04.141/171) layout out the timeframe and requirements after the lien is filed.

Construction projects can be complicated enough without contract disputes. Whether you're a contractor or property owner, it makes sense to consult your attorney for a contract review.

Learn more by watching the full session below. As always, reach out if you have any questions.