Contracts are essential for protecting your interests and ensuring your project runs smoothly. They document every phase—from initial sketches and design drawings to final working plans, cost estimates, and signed agreements. This paper trail, ending with your Certificate of Occupancy, provides a clear roadmap and legal protection.
A well-drafted contract outlines each contractor’s responsibilities, payment terms, and project scope. Typically based on standard legal forms, these agreements are negotiated and signed by you, the contractor, and possibly your attorney to ensure clarity and accountability.
Why Every Construction Contract Must Be in Writing
A written contract isn’t just recommended—it’s often legally required. Without written terms, disputes become a matter of memory, not facts. A clear, signed agreement helps protect both you and your contractor by outlining expectations, deliverables, and payment terms from the start.
Even if you rarely reference the contract after signing, it defines your legal relationship and becomes essential if conflicts arise. It clarifies responsibilities, timelines, and payments, ensuring accountability on both sides.
A valid contract should include detailed descriptions of the work, materials (including brands, models, and specifications), pricing, schedules, and payment terms. If initial estimates were based on drawings or specifications, those should be included too. Never rely solely on a handshake—put everything in writing.
Many home improvement contracts start as estimates. A contractor might visit your home, assess the project, and write an estimate on a standard form—complete with scope, materials, and pricing—on the spot. They may ask you to sign immediately and pay a deposit. While this may seem simple, it’s still a binding agreement, so review every detail before you commit.
Read More: Qualify for Tax Credits with Your Home Improvement Project
Before You Sign a Contractor Agreement: What to Know
Don’t rush into signing a contract—even if the contractor seems trustworthy, you’re in a hurry, or you’ve worked with them before. Taking time to evaluate the agreement can save you from costly mistakes.
No matter the project’s size or budget, ask key questions:
- Is the contractor’s work high quality? Check references and inspect past jobs.
- Is the price reasonable? Get at least three comparable estimates to judge fairly.
- Is the contract balanced? Long, fine-print contracts should be reviewed by a lawyer—especially if the job costs more than a week’s pay.
- Do you fully understand the terms? Legal language can obscure unfair clauses. Make sure every word is clear.
- Does the contract include all documents and changes? Ensure it covers plans, specs, estimates, and revisions. Verbal agreements won’t hold up in court.
Smart contract review helps prevent disputes and protects your investment. Read everything. Ask questions. Then sign with confidence.
Smart Payment Terms for Hiring a Contractor
Never pay a large sum upfront. A reasonable down payment is 10–15% of the total project cost. Payments should follow actual progress—not promises or paperwork.
If a contractor asks for too much before work begins, consider it a red flag and look elsewhere. Hold back at least 15–20% until the entire job is complete. For work in progress, release funds only when specific milestones are met or major materials are delivered.
Controlling payments is your best leverage for ensuring quality. Pay only for work that meets your standards—nothing more, nothing earlier.
Types of Contractor Contracts: What to Know
Not all contracts are the same. Loan agreements from banks usually come as non-negotiable, standardized documents packed with financial terms. In contrast, builder and contractor contracts are often customized, requiring detailed discussions.
Contract types vary based on how pricing is handled. Some agreements lock in a total cost upfront, giving you a clear final price. Others offer flexibility, adjusting based on labor, materials, or project changes.
There’s no universal best choice. The right contract depends on your project’s size, scope, and budget. Here’s a breakdown of your main options.
Lump-Sum vs. Cost-Plus Contracts: What You Need to Know
Lump-Sum Contract
For straightforward projects without custom materials or complex designs, a lump-sum contract offers clarity. The contractor reviews your plans and provides a fixed price. As long as no changes are made, that price is locked in.
This contract is simple and helps you budget with confidence. However, since the estimate won’t break down material or labor costs, it’s hard to know how much is markup. To protect yourself, always get at least three estimates for comparison.
Keep in mind: Many contractors avoid lump-sum agreements for renovation work due to unknowns—like hidden damage or hard-to-source materials. Unexpected issues can quickly erode their profit.
Cost-Plus (Time-and-Materials) Contract
In a cost-plus arrangement, you pay for actual labor and materials, plus an agreed-upon fee (often 10–20%). For example, if materials cost $50,000 and the contractor’s fee is 20%, you pay $60,000 total.
The downside? The more your contractor spends, the more he earns—giving little incentive to keep costs down. Still, in projects with many unknowns (like older homes or pending design decisions), contractors often prefer this method.
If you choose cost-plus, thoroughly vet your contractor’s references. Trust is essential when costs aren’t fixed.
What Is an Upset Price Contract?
An upset price contract offers the flexibility of cost-plus pricing with the protection of a fixed maximum cost. You and the contractor agree to a price cap before work begins. The job proceeds on a cost-plus basis, but no matter what happens, you won’t pay more than the agreed maximum.
If the actual cost comes in lower, you pay the reduced amount. If it goes over, the contractor covers the difference. This structure encourages cost control while giving you peace of mind.
What Is an Upset Price Contract?
An upset price contract offers the flexibility of cost-plus pricing with the protection of a fixed maximum cost. You and the contractor agree to a price cap before work begins. The job proceeds on a cost-plus basis, but no matter what happens, you won’t pay more than the agreed maximum.
If the actual cost comes in lower, you pay the reduced amount. If it goes over, the contractor covers the difference. This structure encourages cost control while giving you peace of mind.
Understanding Draw Payment Agreements with Contractors
Some contractors—especially smaller subs—may request a draw payment plan to help manage their cash flow. In this setup, you agree on the total project cost and a work schedule, then divide payments across the timeline (e.g., weekly or by milestones). You pay a portion as each phase is completed, ensuring fair compensation for progress.
Draw arrangements work well when closely monitored. Payments should match actual work completed. For example, don’t pay for a third of the job if only a quarter is done. Use your judgment—or rely on your architect or project manager—to assess real progress.
For projects requiring inspections, ensure no payment is made for a stage until it passes inspection. For instance, a plumber might request 50–60% payment after a rough-in, but release funds only after the work is approved.
A smart clause to include in your contract: if the project is unreasonably delayed, you can use the remaining balance to hire another contractor. This clause should define the expected schedule and outline notice requirements, giving you protection if delays become unacceptable.
Should You Include a Liquidated Damages Clause in Your Contract?
Liquidated damages clauses—meant to penalize delays—are common in construction contracts, but often problematic. In some jurisdictions, courts view them as unenforceable penalties.
While they aim to protect you from costly delays, these clauses frequently lead to disputes. If a project falls behind, the contractor may shift blame—sometimes rightfully—on others like inspectors, suppliers, or even weather.
Rather than rely on penalties, it’s usually more effective to include a clear, detailed project schedule in the contract. A well-defined timeline promotes accountability without triggering legal battles.
Why Change Orders Matter in Construction Projects
Change orders are formal updates to your original contract, triggered when materials, designs, or project scope changes. Whether it’s a design tweak or an unexpected issue, every change must be documented.
They don’t need to be complex—but they must be written. Change orders protect both parties and form a critical part of your project’s paper trail, ensuring transparency, accountability, and cost control.
Frequently Asked Questions
Why is a written contract important when hiring a contractor?
A written contract clearly outlines the scope of work, payment terms, timeline, and responsibilities. It protects both you and the contractor by minimizing misunderstandings and providing legal backup in case of disputes.
What is a draw schedule and how does it work?
A draw schedule breaks project payments into installments tied to progress milestones. This ensures the contractor is paid fairly for completed work and keeps the project moving on track.
How many estimates should I get before hiring a contractor?
It’s best to get at least three comparable estimates. This helps you evaluate fair pricing, project scope, and professionalism before making a decision.
What is a change order, and why does it matter?
A change order is a written amendment to the contract that accounts for changes in work, materials, or cost. It ensures all parties agree to adjustments before moving forward.
Are penalty clauses (liquidated damages) a good idea?
Not always. While they aim to discourage delays, they often cause disputes and may be unenforceable in some areas. A detailed project schedule is often more effective.
Can I fire a contractor if the project is delayed?
Yes—if your contract includes a delay clause. Include terms allowing you to terminate or reassign the work if unreasonable delays occur and notice is given.
Should I pay a contractor hourly or by fixed price?
For most projects, a fixed-price contract offers better cost control. Hourly rates can lead to higher expenses unless tightly monitored.
Conclusion
Hiring a contractor is one of the most critical decisions in any construction or renovation project. A clear, well-structured contract protects your budget, timeline, and peace of mind. From choosing the right pricing model to documenting every change and payment, every step should be backed by written agreements and smart planning.
