You own a successful dental practice, and you are tired of leasing space. You have decided to take the next step and build your own, brand new dental office building. You have even selected a contractor to build your project. What do you need to know, now, before you sign a construction contract? Here are a few quick tips.
1. Have your attorney review the contract carefully, even if it is a preprinted form.
Most contractors prepare their own construction contracts using preprinted forms. These forms are available from a variety of publishers, but the two most popular versions are a set of construction documents called ConsensusDocs and another set prepared by the American Association of Architects, commonly known as the AIA forms. Each set has its own advantages and disadvantages to an owner — ConsensusDocs tend to favor the contractor over the owner, AIA forms sometimes place too much of an emphasis on the importance of the architect in the construction process. In my opinion, neither set of construction documents is sufficient to protect you, as the owner of the project, without some additions and deletions.
Your contractor may pressure you to sign the construction contract, without having an attorney review it, since it is “just a preprinted form.” Keep in mind, however, that you are making a substantial financial investment in your new office building — perhaps the largest financial investment you will ever make — and your construction contract will be the only protection you have against the many risks of new construction. Don’t gamble with your success and your practice. Ask your attorney to review the contract before you sign it.
2. Use a “Stipulated Sum” or a “Guaranteed Maximum Price” Contract.
One of the greatest risks you will encounter in building a new building is the risk of substantial cost overruns. Before you begin your construction project, make sure that you know what the final cost will be. To accomplish this, you should make sure that your construction contract provides for either a “Stipulated Sum” or a “Guaranteed Maximum Price.”
A “Stipulated Sum” is a flat amount that will be paid for the construction, regardless of whether the actual costs incurred by the contractor are higher or lower than the Stipulated Sum. A “Guaranteed Maximum Price” contract provides that you will pay all of the costs of construction plus a fee equal to a percentage of those costs, up to a maximum amount called the “Guaranteed Maximum Price.”
3. Watch out for change orders.
Even if you have a Stipulated Sum or a Guaranteed Maximum Price contract, you could still end up paying more than you expect if you ask for any changes in the work after the original contract is signed. Your contractor can charge you for these changes, which are commonly referred to as a “change orders,” even if, as a result of these additional charges, the cost of your project will exceed your Stipulated Sum or your Guaranteed Maximum Price. Moreover, work that is added to a project by a change order often costs more than work that is included in an original construction contract. Consequently, it is very important to make sure that your construction contract describes the work to be done by your contractor as accurately and completely as possible.
4. Protect your property from the risk of mechanic’s liens.
If a contractor does work on your property, and you do not pay that contractor, the contractor can place a lien on your property. Does that mean that, if you pay your general contractor, in full, you can be sure that you will never have a mechanic’s lien on your property? The answer, surprisingly, is no. This is because your general contractor is not the only contractor who will work on your project. Instead, your general contractor will do some of the work and will hire other contractors (called subcontractors and material suppliers) to do the rest of the work and/or supply the rest of the materials that may be needed for that work. All of these subcontractors and material suppliers will have a right to put a lien on your property if they are not paid.
The risk to you, as an owner, comes from the fact that you will probably not pay all of these subcontractors and material suppliers directly. Instead, most owners give their general contractor the money to pay the subcontractors and material suppliers. If the general contractor actually makes those payments, everything is fine. Occasionally, however, a general contractor receives money from an owner to pay subcontractors and material suppliers but does not actually use the owner’s money to make those payments. If that occurs, the unpaid subcontractors and material suppliers can put a lien on the owner’s property, in spite of the fact that the owner has already paid the general contractor for this work.
In this situation, the owner would, of course, have a right to sue the general contractor for failing to use the owner’s money properly, but this right will not be of much use to the owner if, as is often the case in these situations, the general contractor has filed a bankruptcy petition. In that case, the owner will be left with the problem of getting all of those subcontractor and supplier liens released, with little or no help from the general contractor. To accomplish this, an owner will often have to pay those subcontractors and suppliers some or all of the money owed to them, in which case the owner will, in effect, have paid for the same work twice. To avoid this risk, you should have your attorney review all of the payment and lien waiver provisions of your construction contract very carefully.
This article was written by Janice L. Gauthier, Esq. Ms. Gauthier has an A.B. from Harvard University and a J.D. from Harvard Law School. She is the owner of The Gauthier Law Group, LLC, a boutique law firm that represents dentists, physicians, health care providers, professional service practices and other businesses and business owners in Wisconsin and Illinois. You can contact Ms. Gauthier at 414-270-3857 or by email. To learn more about Ms. Gauthier’s background and experience, visit her Google or LinkedIn profiles.
© 2012, 2013, 2014 The Gauthier Law Group, LLC