Construction Contracts: What Homeowners Should Understand Before Signing
You've found your builder, agreed on a price, and you're ready to get started. Just a few signatures between you and your new home, right?
After months of planning, design, and collecting bids, signing a construction contract can feel like the final hurdle before the exciting part begins. You've selected a builder you trust, the numbers look reasonable, and you're probably more than ready to see some actual construction happening.
But before you sign on the dotted line, it's worth understanding exactly what you're agreeing to. A construction contract establishes much more than the price of your home. It defines responsibilities, payment obligations, procedures for changes, and what happens when things don't go according to plan.
You don't need a law degree to understand the basics, but you should know enough to recognize when something deserves a closer look.
What Type of Construction Contract Are You Signing?
Residential construction contracts can use different pricing structures, and understanding yours is essential because it determines how costs are calculated and who bears certain financial risks.
The three common approaches are:
Fixed-price (lump sum): The builder agrees to complete a defined scope of work for an established price, subject to contract provisions for changes, allowances, and other adjustments.
Cost-plus: The owner pays the allowable actual costs of construction plus an agreed builder's fee, which may be a percentage or fixed amount. The final cost can vary considerably unless additional limits are established.
Cost-plus with a Guaranteed Maximum Price (GMP): Similar to cost-plus, but with an agreed maximum price for the defined scope, subject to the contract's exceptions and adjustments.
No pricing structure is automatically the best choice for every project. A fixed-price contract may offer greater initial cost certainty, while cost-plus arrangements can provide more visibility into actual expenses. The important thing is understanding how your specific agreement handles cost changes, allowances, contingencies, and builder compensation.
Make Sure the Scope of Work Is Clearly Defined
Your contract should identify exactly what the builder is responsible for constructing. This typically means incorporating your construction drawings, specifications, and other relevant documents into the agreement. It should also establish which document revisions apply and how conflicting information will be resolved.
Pay particular attention to exclusions, owner-supplied materials, and work performed by separate contractors. If landscaping, utility connections, appliances, or driveway construction aren't included, those costs may still be your responsibility. A contract that simply references "building the house according to plans" may leave important questions unanswered.
If your builder's proposal includes assumptions or substitutions that differ from the drawings, make sure those differences are resolved and documented before signing. Your architect can help evaluate technical changes and confirm that the contract documents reflect the intended design.
Understand the Payment Schedule
Construction contracts typically establish when and how the builder will be paid. Some use payments tied to construction milestones, while others require periodic applications for payment based on work completed and, where permitted, materials appropriately stored for the project.
Before signing, understand:
Deposits and initial payments: How much is due upfront, what the payment covers, and whether local law limits the amount.
Progress payments: How payment amounts are calculated, what documentation you'll receive, and how completed work is verified.
Retainage and final payment: Whether a portion of payment is withheld until certain requirements are satisfied, and what must happen before the final balance becomes due.
If you're financing construction through a lender, confirm that the contract's payment schedule is compatible with the lender's draw process. Also understand how lien waivers or releases will be handled, since paying the general contractor doesn't always guarantee that subcontractors and suppliers have been paid.
What Happens When the Price Changes?
Even a carefully planned project can encounter unforeseen conditions, material substitutions, or necessary adjustments during construction. Your contract should establish how these changes are proposed, priced, approved, and documented.
Most contracts use change orders, which are written agreements modifying the original scope, price, or schedule. Review who has authority to approve changes, what documentation is required, and whether the builder can proceed with additional work before receiving written authorization. Some contracts also address urgent work or disputed changes through separate procedures.
Ideally, major design decisions and material selections should already be complete before construction begins. Changes may still be necessary, but they should be the exception rather than the primary way decisions are made.
Pay Attention to the Construction Schedule
Your contract should address when construction is expected to begin, the anticipated duration, and what constitutes completion. It should also explain how delays are handled, including weather, material shortages, owner-requested changes, and circumstances outside the builder's control.
Some contracts include provisions for extensions of time, notice requirements, or financial consequences associated with delays. Others establish relatively broad scheduling expectations without a firm completion date. Neither approach should be accepted without understanding what it means for your project.
If you're coordinating construction financing, temporary housing, or the sale of another home, scheduling provisions deserve particular attention. An anticipated completion date and a contractual commitment to finish by that date are not necessarily the same thing.
What Insurance Should Be Required?
Construction involves substantial financial risk, and your contract should clearly establish the insurance responsibilities of the parties involved. Your builder should carry appropriate coverage for their operations, but that doesn't necessarily mean every potential loss to your property is covered.
Common policies to discuss include:
Commercial general liability insurance: Typically addresses certain claims involving bodily injury or property damage arising from covered business operations.
Workers' compensation insurance: Provides coverage for qualifying work-related employee injuries, subject to applicable state requirements.
Builder's risk insurance: Generally protects the home and certain materials against specified physical losses during construction, subject to policy terms and exclusions.
Ask who is responsible for obtaining each policy, what coverage limits apply, and whether you should be named as an additional insured or otherwise protected under the relevant policies. Your insurance agent can help evaluate coverage gaps and coordinate the transition to permanent homeowners insurance.
Warranties, Defects, and Project Closeout
Your contract should explain what happens if construction work is defective or doesn't meet the agreed requirements. Review the builder's warranty obligations, how warranty claims must be submitted, and whether particular materials or systems have separate manufacturer warranties.
It's also important to understand how the contract defines substantial completion, which generally refers to the point when the project is sufficiently complete for its intended use, subject to the applicable contract terms. Substantial completion doesn't necessarily mean every item is finished, and it may trigger important payment, insurance, or warranty provisions.
Before final payment, the contract should establish procedures for addressing outstanding work, completing required inspections, and delivering applicable closeout documents. These may include warranties, equipment manuals, final approvals, and other records you'll need after moving in.
What If There's a Disagreement?
Even when everyone starts with good intentions, disagreements can arise over costs, delays, workmanship, or interpretations of the contract documents. Your agreement should establish how disputes will be addressed and what steps are required before formal legal proceedings.
Some contracts require mediation before arbitration or litigation, while others specify particular dispute-resolution procedures, deadlines, or locations. These provisions can significantly affect your rights and options if a serious disagreement occurs.
Your architect may be able to help clarify technical questions or evaluate work against the construction documents, depending on their agreement and contractual role. However, an architect isn't a substitute for legal counsel. If you don't understand a contract provision or are concerned about how it allocates risk, have a qualified construction attorney review it before signing.
Should You Use a Standard Construction Contract?
Industry organizations such as the American Institute of Architects (AIA) publish standardized construction agreements that establish commonly recognized contractual procedures and responsibilities. These can provide a useful starting point, particularly when an architect will remain involved during construction.
However, standard forms aren't automatically appropriate for every residential project, and they often require modifications to address the specific scope, pricing arrangement, and applicable state laws. Builders may also use their own agreements, which should receive the same careful review.
Regardless of which form is used, don't assume that a contract is fair or complete simply because it looks official. The actual terms—and any modifications—are what matter.
Final Thoughts
A construction contract isn't just paperwork standing between you and the groundbreaking ceremony. It's the document everyone will return to when questions arise about costs, responsibilities, schedules, or changes.
Take the time to understand what you're signing, ask questions about unclear provisions, and confirm that the agreement accurately reflects the project you intend to build. Your architect can help with technical scope questions, while a construction attorney and insurance professional can advise on legal and coverage issues.
Ideally, you'll sign the contract, file it away, and rarely need to reference its more complicated provisions. But if something does go wrong, you'll be glad you spent a little extra time reading the fine print before handing over the pen.