In last month's blog post, I discussed how you can go about finding and choosing a general contractor for your project.  This month will explore the contract for construction itself.  First let's look at how contractors typically get paid.

HOW CONTRACTORS GET PAID
The most common way that contractors bill for their work is with a fixed-price bid which includes the cost for labor, materials, products and markup (the contractor’s 20- to 25- percent fee, which pays his overhead and his salary) for each phase of the job.  

Some contractors prefer to work on a time and materials (T&M) basis.  Instead of a set price, they charge as they go for the cost of labor and supplies, plus a markup.  Working on a time and materials basis, you pay only for the hours worked and the materials used, but it means less certainty about the final cost of the project.

The T&M contract may be especially appropriate for a project where there are a lot of unknowns,  such as a remodeling project where you’re uncertain what the contractor may find once he starts opening up the existing house.  An unscrupulous contractor can use a T&M contract to work slowly and pad his fee, so never sign a T&M contract unless it has a price cap (T&M, not-to-exceed contract).

THE CONTRACT
Once you've selected your general contractor, he or she should present you with a contract.  For the protection of both you and the contractor, always have a written contract. It should be clear and concise and should lay out all of your expectations and understandings about the job.  Do not sign anything until you understand it all. You may want to have your attorney review the contract before you sign it.

The contract should include:

• the contractor’s name, physical address, phone number and license number
• the scope of work, as detailed in the architectural drawings and specifications, including each material used and each product’s model, size and brand.  If some materials will be chosen later, the contract should say who’s responsible for choosing each item and how much money is budgeted for it (allowances)
• the itemized bid (if you are using a fixed-price contract)
• estimated project start and end dates 
• any agreements you’ve made (e.g. when the workday starts, who is responsible for getting necessary permits, or whether the contractor is responsible for trash hauling and clean-up work)
• a statement explaining any warranties on materials, labor or services (be sure you understand any exceptions or limitations)
• the payment schedule for the contractor, subcontractors and suppliers
• how changes orders are handled
• a requirement that the contractor obtain lien releases from all subcontractors and suppliers

In addition you should get a list of subcontractors and proof of insurance.


THE PAYMENT SCHEDULE

A contract for construction should include a payment schedule.   The contractor may ask for an initial down payment.  After that, the contract should call for progress payments - that is, installments made when certain predetermined parts of the job (framing, mechanicals, drywall) have been completed to your satisfaction.  Never let the dollars get ahead of the work, so that you’re not paying out money for work that hasn’t been finished.   The final payment (retainage) should be at least 10 to 15 percent of the total cost.  
Before you sign off and make the final payment, check that:

• all work is complete and meets the standards spelled out in the contract
• the contractor has given you all of the product manuals and warranty certificates
• you have proof that all subcontractors and suppliers have been paid (via lien waivers)
• the job site has been cleaned up and cleared of excess materials, tools and equipment

The general contractor should give you lien waivers each time he is paid, as proof that he has in turn paid his subcontractors and suppliers for their labor and materials. If you pay the general contractor, but he fails to pay his subcontractors or suppliers, the subs or suppliers can put a lien on your home.

KEEP RECORDS

Before, during and after construction, keep all paperwork related to your project in one place.  This includes:

• copies of the contract
• change orders
• any correspondence with your home improvement professionals
• a record of all payments - you may need receipts for tax purposes

Keep a log or journal of all phone calls, conversations and activities.  You may also want to take photographs as the job progresses.  These records are especially important if you have problems with your project - during or after construction.

It takes a team of people to bring a construction project to life, including a lender, architect, homebuilder, material suppliers and government officials. Others may be involved as well, depending on the project.
 
LENDER
 
Many people who build a new home will borrow money from a bank, credit union or mortgage lender to fund their project.  The lender will decide what they can afford to borrow based on their monthly income, existing debt, anticipated home-related expenses, and credit score.  The lender will be interested in the value of the finished home because they don’t want to lend more than what the house can sell for.  They will want floor plans and elevations and will have the design of the prospective home appraised to determine its value. A lender will usually require that the borrower contribute a percentage of the cost of the home in the form of a down payment.
 
For an existing home, equity that has been built up may be borrowed against to fund remodeling or an addition to that home, in the form of a home equity loan.
 
Before approaching an architect or builder, it’s helpful to meet with a lender in order to know how much can be borrowed.
 
ARCHITECT
 
The architect will design your new home, remodel or addition and may also guide their client through the bidding and construction processes. 
 
HOMEBUILDER
 
The builder actually constructs the new home, remodel or addition.  The builder and their crew will likely do some of the work themselves but will also subcontract out parts of the job that they don’t have the in-house expertise to do.  Trades (subcontractors) that are frequently “subbed out” include concrete, cabinets and other millwork, electrical, plumbing and heating/cooling, as well as specialties such as sound or security systems.
 
The builder will have a contract with each of these subs, and the lender will likely require lien waivers from the builder, showing that the subs have been paid for their work. 
 
MATERIAL SUPPLIERS
 
The builder will typically have certain material suppliers that they like to work with. The homeowner will likely have little to no involvement with the supplier of materials such as trusses, lumber and sheathing but may work directly with suppliers of cabinets and counters, floor finishes, and plumbing fixtures, who may have showrooms where homeowners can view their products.
 
MUNICIPALITY, COUNTY AND STATE
 
The local municipality, county and state will also be involved in the project by way of ordinances and code requirements.  The municipality will usually have rules about what and where you can build on your property.  The county may have rules about private sewage systems, and building near flood plains, bodies of water or wetlands.  The state has mandatory building standards in the form of the Uniform Dwelling Code. Depending on the nature of your project, a building inspector may be required to inspect the project at certain stages of construction.
 
 
The project team may also include the following: 
 
INTERIOR DESIGNER
 
An interior designer can help with the selection of cabinets and countertops, flooring, tile, light fixtures, and plumbing fixtures  (although an architect may also help with these selections).  An interior designer can also help select and purchase furniture, window coverings, and paint colors.
 
LANDSCAPE ARCHITECT
 
A landscape architect is a specialist in the grounds surrounding the home.  They can help with the design of patios and other outdoor paving, trees, shrubs and flowers, decorative or retaining walls, outdoor lighting, and water features. 
 
STRUCTURAL ENGINEER
 
Depending on the structural complexity of a project, a structural engineer may be involved. They will usually be a subcontractor of the architect.
 
ENERGY MODELER / CONSULTANT
 
The services of an energy consultant may be included on projects where the client has a strong interest in energy efficiency.  The energy consultant can work with the architect and builder to suggest the best ways to build an energy-efficient home and may do energy modeling to predict the energy performance of a new home, possibly modeling different floor, wall and roof assemblies.
 

Unfortunately, there's no easy answer to that question.  Building costs can vary widely depending on the home design, materials and details used and even location.  Here is a Fine Homebuilding article I've found which does a great job of discussing some of the decisions which can affect the price of a new home.  It appeared in issue #259,  the Spring / Summer 2016 issue of Fine Homebuilding.

​If you're building in the country, don't forget to add the cost of a septic system and well as well as a driveway.
​

If you're planning to borrow money to build an addition or remodel your existing home, it's a good idea to check with your lender early in the process to get an idea of what your options are and how much you can borrow.  

If your equity in your home is greater than the cost of the addition / remodel, you're in luck.  With a home equity loan or home equity line of credit, you may be able to borrow as much as 100% of your equity for your building project, although you will likely pay a higher interest rate if the loan to value is greater than 80%.  

If you don't have enough equity, you will probably need to take out a construction loan.  A construction loan typically has an adjustable rate while the project is being built and will be converted to a permanent mortgage once construction is complete.  During construction, you pay interest on the funds that have been paid out.  

For a construction loan, the lender will want to have a copy of the building plans, as well as your builder's bid to do the work.  An appraisal is the basis for determining how much you can borrow. An appraiser will estimate the value of your home with the planned changes.  Typically a homeowner can borrow up to 80% of the value of the improved home.  Appraisers will judge the home's value based on the sale price of "comparables" - other homes in the area which are similar in size and age and which have sold recently.  It may be difficult to find comparables that are very similar, particularly if the home is highly unique.  

Homeowners may find that they're not able to borrow as much as they had hoped.  Some improvements add very little to the appraised value of a home.  Adding square footage to a home by adding another bedroom will likely increase the value of the home, although not necessarily as much as the cost of the improvement.  By contrast, beautifying the inside of a home might add little, if anything to the appraised value.  Using more expensive finishes or higher quality details may have little effect on the appraised value, because the appraiser has likely never seen the inside of the homes used as comparables, and so he or she is judging value based mostly on size, age and number of rooms rather than construction quality.

Here are some common mistakes to avoid when you're planning an addition:

1.  IGNORING THE SHAPE AND STYLE OF THE EXISTING HOUSE:    An addition should be similar in proportions and style to the home it's being added on to (unless there is a conscious choice to make the addition look clearly different).  Sometimes this requires breaking the addition into smaller parts so that it doesn't overwhelm the house.   Height and rooflines of the existing house need to be considered as well.

2.  NOT CONSIDERING HOW DAYLIGHT WILL BE AFFECTED:  An addition can make adjacent spaces dark.  A room that was once warm and inviting may become dark and cold if an addition blocks existing windows.  

3.  THINKING THAT BIGGER IS BETTER:  There's a temptation to think that as long as you're adding on, you may as well "get your money's worth" by making it big.  It's better to design smart, not big.  Think about how the new space will be used and make it only as big as is necessary to meet your goals.  Consider how existing spaces may be repurposed to work with the addition.

4.  UNDERBUDGETING:  The cost per square foot of an addition is often higher than the cost per square foot of a new house, particularly if it involves structural changes to the existing house.  With any construction project, it's wise to assume that it will cost more than you think.  Decide which things are essential and which can be optional if the budget allows.  Include an additional 15 - 20% contingency for unexpected expenses.

5.  NOT CONSIDERING FLOW:  Think about how people will move from the existing house to the addition.  How open should the new and old spaces be to one another?  Where will furniture be placed?  Avoid chopping up rooms with too many doors, which makes furniture placement difficult.

I've just added a home planning guide to my website.  For most people, a home is the largest investment they'll ever make.  The 6-page Home Planning Guide takes some of the mystery out of designing a new home, addition or remodel.  It covers the following:

• The factors you need consider in the design of your new home, addition or remodel
  
• The characteristics of a successful addition
  
• Contractors and Schedules
  
• Zoning ordinances, building codes and covenants

Here's a link to the guide

Images of beautiful homes are everywhere:  on the internet, in home magazines, on television. We may see these beautiful things and want them for ourselves.  Unfortunately, we’re rarely given a sense of what they cost to build and may be unpleasantly surprised when we dig deeper.  

I think it’s only human nature that our wants are greater than our ability to pay for them.  No matter how large our budgets for a new home, addition or remodeling project, there will be things that we’d like to include but aren’t able or willing to pay for. 

If you’re thinking about remodeling an existing house or building a new one, consider these strategies for keeping costs in line with what you can afford:

1. Build no more than you’ll use regularly (for example, consider eliminating the formal living room and formal dining room, unless these are spaces that are an important part of your lifestyle).
2. Determine your priorities:  what is absolutely essential? what would be nice to have but could be eliminated if necessary?
3. Consider using expensive materials, such as stone, in limited amounts in places where you’ll be able to enjoy them every day, (for example, using stone on the fireplace in your family room, rather than on a chimney surround that’s barely visible from the ground).
4. Build what you like and will use, not what you think will increase your home’s resale value (how often will you use that mammoth whirlpool tub and fireplace that you’re considering for your master bathroom?)  This assumes that you’re not building with the intention of selling soon. 
5. Consider lavishing more money on spaces that are important to you, and being more frugal in spaces that are less important (for example, splurging on a special tile backsplash in the kitchen if you love to cook and do it often, but keeping things simple in the bedroom if you use it mostly for sleeping).

Sustainable or “green” building means reducing the negative impacts that our buildings have on our environment and on ourselves. 

According to Alex Wilson, founder of BuildingGreen.com, the top ten priorities in green building are:

1. Reduce energy use
2. Reduce water use
3. Ensure a healthy indoor environment
4. Reduce the need for driving
5. Build smaller and optimize materials use
6. Ensure durability and reuse existing buildings
7. Protect and restore the site
8. Use green materials
9. Create resilient, climate-adapted buildings
10. Make it easy for homeowners to be green 

Given the fact that fossil fuels are a major contributor to global warming, that world demand for those fossil fuels will eventually exceed easily-obtained supplies and that we are dependent on foreign countries for much of the energy we use, the most important thing we can do to make our buildings more sustainable is to design, build  and operate them to use less energy.  

Sustainable design requires a systems approach from the beginning of the design process - considering how the different parts of a building work together.  It is not a feature or two that are tacked on after the design is complete. The heart of an energy efficient home is a tight, well-insulated building envelope with high quality windows and doors, and efficient heating equipment, appliances and lighting. These measures require more care during construction and may add some small additional cost during construction but will save money over time in reduced energy bills.

If a homeowner is truly interested in sustainable building, it is important to work with a builder who has experience in building energy efficient homes or is willing to learn.  And finally, even the “greenest” home will waste energy if its occupants are not using it in a thoughtful way to save energy.