Toomoften a contracxt is viewed as an estimate. Adding costs depends on several things----type of work---whether there is any area for unforeseen problems, length of the job---meaning time for price increases in material, type of business doing the work---meaning having on staff personnel versus using sub contractors, and finally the willingness of the person signing the contract to stick to the terms.

Adding a percentage to the original amount should cover changes---for instance, I had a house built in 1978, we signed the contract in Frbruary for a final delivered price of $47,500. We had several areas for choices, lighting, interior colors, brick color, shingle color, plumbing fixtures and trim color. Each area had a limit in the amount we could spend---we could spend over that amount, but it was our cost then---at the time of purchase, not at the completion of the house. That contract prevailed, when we exceeded our lighting amount(several hundred dollars out of OUR pocket) to the fact the builder had to pay for us to live in a motel for a month when the house could not be finished on the extended schedule. We still paid $47,5000 for the house.

A friend had a kitchen remodeled and it went $25,000 over a $30,000 budget---and took longer than the 8 months to build that house.

In what sense is it "essential that [you] come in at [y]our budget?" Do you mean that the estimates you've received consume all of the resources you can afford to put into the project? If so, you should probably scale it back somewhat. Prices agreed upon ahead of time can only be based on what is known ahead of time. None of these professionals and tradespeople have X-ray vision, so there's always the potential for unwelcome surprises when working on an existing structure.

I am working on scaling it back but I'm trying to figure out how much owners may rely on professionals' judgment and also how much to set aside for any unknowns. (I do recognize that an existing structure presents problems but I wonder what the value of a contract is to an owner if the risk is all on one side.) In any case, my question is about actual bids and contracts based on them, not estimates.

X-rays would be good!

The post is a little cryptic and confusing. Why would you,"quickly enter this next stage.", when you don't know what you're signing?
Have you had a lawyer look over this contract? Have you put aside 10-15% of the cost for possible overruns?
It sounds like you're adding on to an existing strucure. Issues can arise melding the two units into a unitized structure. This could add to the initial cost.
You are in no way ready to sign any binding document. You need to educate yourself about the legal implications before, "slowly" going onto the next step.
It would also help if you were a little more verbal about the details of this renovation.
Ron

It may be cryptic and confusing but I didn't choose to write an entire story. (Actually there isn't a story.) When one receives a bid, usually one has entered a new stage. That's pretty quick: from one minute you don't have a bid to the next minute when you do. To date all I have are estimates.

How can I have a lawyer look over a contract that I already said I haven't seen yet myself? Answer: no, I haven't.

One question I posed was how much should I put aside and my further question was how much of these "overruns" is typically due to unforseen circumstances versus changes that the owner chooses. There's nothing wrong with asking that question without being "more verbal."

So, a simple and general question to which I get a hostile answer from ron6519. Ron, you are in no position to make statements about my readiness to sign a binding document. In fact, you have no idea how much about law I happen to know. Do you?

You may be frustrated that I haven't said more but there isn't really any fancy back story here: I'm only trying to get some idea of why overruns happen, to what degree they happen, and why it is that owners cannot rely upon professionals to prevent them from happening. If you signed a contract with a lawyer or a doctor to do something for a set price, based on labor and materials, and they encountered some unforseen circumstances, they would likely eat the costs, not the person who had contracted for their services. When I see a contract I will decide whether I want to sign it but that in no way means that I don't have some questions about remodeling contracting in general.

As handymac says, a contract is contained within the four corners of the document. I'm just trying to ascertain why construction contracts seem to have a fifth corner.

Thank you for your constructive input, no pun intended.

"If you signed a contract with a lawyer or a doctor to do something for a set price, based on labor and materials, and they encountered some unforseen circumstances, they would likely eat the costs, not the person who had contracted for their services."

No they don't eat anything. They are called professionals and they will charge you for every extra minute that they think they need.

I'll try to answer this from my own experience. The contract will cover everything in the plans and specifications, and SHOULD assume best practices. However, some contractors will literally not include a door stop in an obviously required place, if none is shown on the plans (yes this happened to me), while others are more careful, or perhaps they pad their estimate a bit to take these smaller "oops" into consideration.

We started a project about five months ago, major addition and renovation, and virtually ALL of the change orders to date have been for unforseen conditions. Most are structural, having to do with the existing foundation (or lack thereof). Yes, the structural engineer should have known these things, but didn't and the contractor can't be held responsible for them, and we can't build on top of something that's not structurally sound.

Bottom line, don't go into a contract without 15% contingency for these sorts of things.

"I wonder what the value of a contract is to an owner if the risk is all on one side."

I think you're conceiving of the risk involved in such a project too narrowly. There are plenty of risks that naturally fall on the contractor's side of the fence. The price of some material may spike, an employee may damage your house or (worse) be accused of stealing something, he may have to foot the labor bill for replacing materials with latent defects, you may sue him for something frivolous or your checks may start bouncing. Any such event can cost the contractor plenty. For the project to go forward, both parties have to be satisfied with the balance of risks and rewards described by whatever agreement you come to, however formal or informal it might be.

You can shift some of the risk towards the contractor by buying into, at a higher price, a lower-risk sort of contract; effectively you'd be buying a sort of insurance. This might mean choosing a different contractor rather than simply changing a document.

A contractor can shift some risk away from himself too, by using contract language that puts the weight of the risk on the homeowner. This might mean he uses a cost-plus sort of structure or that he works cheap and makes no promises... either way he gives up some reward as he offloads the risk. Again, his choice here isn't just about contract language; it's also about which customers he ends up working with.

Recommended percentages to have in reserve vary wildly, from 10% to 150%. You and the contractor both have the opportunity to shrink the risk by being thoughtful, methodical, careful and smart in your planning, but neither of you can eliminate it.

No one can (or should) try to answer your question without knowing the completeness of the design documents (full framing and spec?), the terms of the contract (allowances, mark-ups, work by others?), the site conditions (rock, ground water?), the climate, and in general, your ability to deal with frustration and disappointment.

Never build without a contingency. And if you can't accept the possibility that it might be spent then it isn't really a contingency.

I would recommend a contingency of 15% and reduce it if the variables and risks are less than normal.

If you have an architect, why is the contractor submitting a contract? It should have been given to him as part of the bid package. You are already accepting a risk if you are allowing the contractor run the project.

And if you have an architect, why would that not be the best person to ask this question?

mightyanvil, I have an architect and the contractor will only use his own contract. I don't think this is unusual, the typical AIA General Construction Contract is pretty weighted toward the owner and so GC's either modify it or have their own. I didn't like my contractor's contract, but by the time we got to that point, I'd already searched for the best contractor and felt he was it, so my options were to start over or cross my fingers and sign on the dotted line. We made a few changes to his contract too (because it was heavily weighted to HIS side of course). Contracts are very tricky these days with so much litigation and finger pointing going on, everyone is trying to cover themselves.

Definitely need contingency though, it's just a fact of life, unless you're building a brand new home on a very average site and have extremely thorough architectural plans that are completely detailed.

I would have told you to allow at least 20% for overruns - 10% for what you forgot, 10% for what goes wrong - something always goes wrong.
No matter how experienced we professionals are - we have no x-ray vision and the owner sees the space differently when it is being built from how it was on paper.
The AIA contract is much too complicated for much residential construction.
Hire someone with a good reputation whom you trust. Hire someone whose clients wait for him to have time to come back for the next phase! My best jobs are where the owner, contractor and architect work as a team. A budget is essential - it makes us all focus on what is really important, we make good decisions when money counts.

Many structural issues are unforseen before the walls are opened up. Who knew that termits had eaten out all of the studs and sill plates all along on the one side of the hous? No way to know for sure until the wall is opened up. Who knew the existing foundation would not support the second story until the excavation began? Or that a giant rock was right in the way of the new addition? Or that the current electrical inside the wall was knob and tube that you now have the chance to upgrade to modern standards? Or that the plumbing waste pipe was slowly leaking from the upstairs shower and you now have black mold and a mold remediation situation? Or that asbestos tiles would be discovered under that flooring that you were so sure was the original subfloor?

There are literally thousands of permutations of "we didn't know until this happened." There are also plenty of instances of the consumer "while we are at it" impacting the budget. FOr instance, the knob and tube wiring is grandfathered in and still meets code for when it was installed, but who wouldn't take the opportunity to upgrade it when the studs were open?

20-50% costs overruns are extremely common in remodels, even with a very detailed spec for the bid.

What is the point of hiring an architect to represent your interest on a project and then letting the contractor take the lead? It's your money; you should be in control.

I use AIA A117 1987 edition "for construction projects of limited scope where the basis of payment is the Cost of the Work plus a Fee" (with a Guaranteed Maximum Price and a shared savings). It's only 12 pages long including the General Conditions and document lists.

We hire the contractor to provide cost estimates during the design period and negotiate the GMP when the drawings are complete.

Some contractors have been hesitant to use A117 but none have regretted it. One told my partner 15 years later that he had used this contract to get higher-end work and it had made him a lot of money. And this was the most arrogant and incompetent contractor I had ever met, a friend of somebody in the owner's family I think.

I'd recommend a contingency reserve of 15%-20% and I base that on our experience, both with very last minute items along with unknowns which couldn't have been anticipated. When we went for our permits, our town required that we do a few more things to bring work to code...i.e. adjusting the floor height of a closet that was directly above the stairs leading to the basement so that we'd have the correct headroom on the stairs. Once we started demo, we found that the wall we were removing hid the fact that the ceilings on either side of that were were at different heights. Thus, more $$ to bring them to level. We knew we were working around a load bearing wall, but we didn't know that a previous owner had made a header our of a series of 2x4s instead of that correct size lvl header. Thus more $$ to fix. We had our remodel planned down to the most picky detail, so we thought, and we ended up going 19% over estimate due to things like this which couldn't have been planned until we got into it. Extra time, labor and material should be passed on to you.

Caligirl, I have another question for you regarding your post of the contract. When you changed the contract (to make it less-contractor-favorable), did you consult with an attorney? In general how receptive was the contractor to your changes?

Would the contractors be willing to send in their contract alongwith their bids so as to get (us) a better idea?

One more note: These questions should be considered in the strict context of geography. In my area (SF Bay Area), contractors are in high demand, and I have heard stories where contractors refuse to meet you halfway.

A competitive bid proposal, in response to a written Request for Proposal that does not contain either the owner’s or the contractor’s contract, should be considered incomplete. All an owner can do is extend the biding period to give contractors time to complete their proposals.

If you have only asked one contractor to submit a proposal, you are negotiating rather than bidding the job and there are essentially no rules because usually the Request for Proposal isn’t even in writing. In this situation, if a contractor doesn’t include a contract in his proposal, he either ran out of forms, or he is playing “close to the vest”, a common tactic. You should either ask for his contract or you can send him yours without offering any additional response. In my experience, a counter proposal is more effective that a request in a negotiation.

Of course, you really shouldn’t attempt to negotiate with more than one contractor at a time; it isn’t fair to any of the parties involved. It is important to be able to recognize when competitive bidding has turned into such a situation.

This is the point in a residential project when control usually shifts from the owner to the contractor. To maintain any control the owner needs, in addition to professional site review, a good contract. You can use a contractor’s contract but you have the right to propose changes to it and you need professional advice to do that wisely.

Unfortunately, few lawyers have much experience writing General or Supplementary Conditions for a construction contract, especially structuring fees, mark-ups and allowances, but a lawyer might be able to help you with dispute resolution and termination clauses, two sensitive areas for contractors. I have lectured homeowners at the GardenWeb and elsewhere about Allowances and Mark-ups so I won’t go into that again. If you have an architect he/she can edit that section so you don’t pay for things more than once.

The primary reason for using an AIA contract is that the forms have been continuously written and revised for the past100 years and have been repeatedly tested in courts in all 50 states. I have used them for 40 years and I know them to be fair rather than biased. The AIA 101 Owner-Contractor Agreement and A201 General Conditions are long and complicated and are obviously intended for large commercial rather than small residential work.

The AIA makes two Owner-Contractor contract forms for residential work: A107 and A105. Both are for Stipulated Sum (Fixed Price) payment methods.

The combined Agreement and General Conditions of A107 (for Limited Scope Projects) contains 17 pages, 5 of which are essentially blank for the entry of the names of the participants, the documents, the insurance, and signatures, so it is essentially a 12 page contract.

The combined Agreement and General Conditions of A105 (for Small Projects) contains 10 pages, 5 of which are essentially blank for the entry of the names of the participants, the documents, the insurance, and signatures, so it is essentially a 5 page contract.

People who say these AIA contracts are long or complicated have probably never used them if, in fact, they have ever seen them. These documents deserve to be seriously considered and any architect will have copies available for you and your lawyer to review.

A105 manages to get so small by omitting sections like Dispute Resolution, so if Arbitration or Mediation is desired, it must be added. I believe it is safer to use A107 and delete the sections you and your contractor don’t want with the advice of your architect and lawyer.

It's your money; take charge of your project!

I should also mention that each of the AIA contracts I mentioned costs $8 each and includes 2 to 4 pages of specific instructions for how to fill them out.

Hi Homey,

Unfortunately, no I didn't consult an attorney. I knew none of my attorney friends would have ever let me sign that contract and I knew my contractor would never let me make the changes a lawyer would recommend, so I made the typical naive homeowner leap of faith. I think most contractor contracts are pretty reasonable and a quick run through by an attorney is probably a good idea. I don't think that many contractors are using the AIA form unmodified anymore, they are simply too savvy to the problems it can cause them, and they want to be more covered.

The statement, "I think most contractor contracts are pretty reasonable", is another example of what you call a "typical naive homeowner leap of faith".

Contractor written contracts usually provide less protection for an owner than AIA forms but the AIA forms are sometimes criticized by lawyers for protecting the contractor and architect at the expense of the owner. If an architect is not involved in the construction phase, that criticism is moot.

Here is a quote from a lawyer:
"Given the opportunity, most contractors prefer to submit to their owner/client for signature the "Standard Form AIA (American Institute of Architects) Agreement" between owner and contractor. There is little wonder why contractors prefer such a template agreement. Standard AIA agreements are drafted from the perspective of the architect or contractor. They do little to protect the owner's interests. Because our firm typically represents owners, we draft agreements from the owner's perspective."

You are quite mistaken about AIA contracts; they are not biased toward the owner and they can be easily edited. The fact that they are balanced is why they have survived for 100 years.

It appears that there will be an architect involved with this project. Rather than offering guesses and assumptions, why not let the architect advise this owner.

An architect is required to spend 2 to 3.5 years learning all aspects of building design and construction including administration of construction contracts. A house builder is usually not required to have formal training. The NCARB nationwide architect's license exam is 27 1/4 hours long and 3 hours are dedicated to construction phase services and contracts. Where I live, the entire home construction supervisor's exam is only 3 hours long.

And, of course, the architect works for the owner, so who do you think might do a better job of protecting the owner's interests?

When committing large amounts of your own time and money to a very personal project, I believe it is essential to avoid "polling ignorance" or taking advice from those with a conflict of interest. In other words, you should choose your advisors very carefully and try to rise above the natural and understandable amateur's aversion to professional assistance. ("I would rather put the money into my house")

Don't imagine that you can go toe to toe with a professional builder and win without professional advice. Not everything in life is suitable to a do-it-yourself approach.

For anyone who decides to go-it-alone on a construction project I recommend the book linked below:

Here is a link that might be useful: book

Here is another useful book

Here is a link that might be useful: another book

Thank you for the reference to the book. I certainly agree with the advice to obtain the services of an attorney up front. An "interesting" situation arises where the homeowner is relying on the advice and professional judgment of the architect -- whose fees are a percentage of the construction contract.

Because of the obvious conflict of interest, I've never billed a fee based on a % of the construction cost and I don't know any architects who have.

What you might be thinking of is when a fixed architect Fee is negotiated based on a % of the estimated construction cost. That Fee can be increased when the Scope of Work is increased rather than when the cost of construction is increased.

So, it is usually easy for an owner to avoid this "interesting" situation.

An architect's duty is to protect an owner's interests and therefore does not want to be in a position to profit from a client's cost overruns. You are perhaps confusing the architect's role with that of the contractor who often profits in this manner.

mightyanvil, where do you get copies of A117-1987? The AIA doesn't appear to publish these anymore.

So long as we're back on this subject let me respond to mightyanvil's comments about the % of construction cost. I know architects who do this. And, no, I'm not confusing it with a fixed fee based on an estimated cost. There are plenty out there who do this and yes, it does create a conflict of interest.

I might also add to mightyanvil's comments about contractors using the AIA and never regretting it as entirely false. Most of the smaller contractors who will do the kind of work Homey is talking about in the Bay Area will use a modified contract that they've worked with over the years with their own attorney.

Yes, a bid that doesn't include the form of contract is considered incomplete, and yet that is the norm here, where contractors are in high demand and not likely to provide their form of contract to just anybody unless they're going to be entering into a contract with them (the bid is more or less accepted).

Mightyanvil might be living in a more ideal world, but those of us here in the Bay Area have different realities.

We signed a contract and as the demolition, new concrete and old ceilings were progressing it turned out the the engineer who said in plans to tie into existing beams did not realize there were no existing beams to tie into as the kitchen wall we were removing was holding up the second floor. The oversight cost us $10k in new materials and workmanship. Then we realized the designer did not straighten out the hip roof, $5k more and when this new roof was set in place the whole side wall it tied into was crooked-6K more. After the mechanics of all this ended we were back on track except of course for the upgrades we chose to take advantage of. I would definately add 15% to the cost of any contract. If you don't have that 15% then cut down the scope of the remodel to a point where that 15% is built into your total budget. Said another way, you don't know what you don't know so you need to plan for it.