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The Essential Guide » The Planning Stage » Construction Terms Explained 2: Contracts / Fixed Prices / Deposits / Retentions
Self Build Terms Explained 2: “Contracts, “Fixed Prices”, Deposits and Retentions”
These are definitely three terms which have caused an incredible amount of heated discussion in the Building Industry over the years!
They are, however three terms which you need to become “clued up” on before you start any major project such as a Self Build or Renovation Project.
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1) Contracts:
Everyone knows what a contract is, but there are so many different types of contracts for different circumstances that the chances are you won’t be sure 100% sure of exactly what sort you’ll need for these types of project.
Contracts are needed in any business relationship, because they make sure that everyone knows where they stand in term of what they are expected to “do” and how much they can expect to paid for “doing it”. Contracts also map out the liabilities and responsibilities of each party, together with other matters such as time scales, payment “structures”, and any other matters which either party feels should be included.
If you are planning a fairly small project, - a garden wall, pond, decking etc, the chances are that a contract will not be required. – For these sorts of jobs, a “fixed price” quotation will usually suffice, together with a written “structure” of payments. BUT, for anything much more substantial than that, contracts are VERY important, and if you start your Self Build or Renovation projects without using them, you are asking for trouble.
Here’s an example of what you could expect in terms of a contractual agreement for a “Garden wall” or similar project:
“Jones the Build” 1 Smith Street, Some Town, Somewhere.
Date: 01/ 01/ 01
Garden Wall at “Any house” “Any Street” “Anywhere”.
Fixed price Quotation to construct a garden wall to the front of the property, as per the information on the attached drawing.
Quote includes for all labour, plant and materials, and allows for machine digging a 450mm wide footing to 600 mm deep.
Bricks are to be “Rustic Riven Mixture” by “Brandon Brick manufacturers” as per sample given to us by the client.
The client confirms that there are no services or other objects within the ground which may be encountered as excavation is carried out.
Quotation:
To excavate footing with a mechanical excavator, pour the foundation in mass concrete 225mm deep. To set out and construct the wall to a good standard of workmanship, using standard sand and cement mortar and concrete common bricks up to 2 courses below ground. Sand and cement mortar and the clients own facing bricks for the remainder of the work. Height of completed wall to be 900mm above finished ground level. Install dpc, and set “coping bricks” as per the drawing, on the top of the wall. Joints to be “Raked out” to 10mm.
Price for the work: £1750 (price fixed for 3 months from the date given above)
Payment:
25% after foundation concrete has been poured.
75% within 7 days of the completion of the work to the reasonable satisfaction of the client.
Conditions: If obstacles are encountered in the ground, which mean that we need to hand dig, then the price will be increases accordingly at the rate of £10.50 per man hour for hand digging. – In the event of hand digging being necessary, the client will be informed and confirmation will be needed from the client in writing, agreeing to the extra work.
Any other changes to the work which will alter the total amount payable will also need to be in writing.
Any extra work involving bricklayers will be charged at £15 / hr / man.
Any extra work involving general labour will be charged at £10.50 / hr / man.
We assume on giving this quote that any “Planning” or “Building Regulation” matters have been successfully dealt with by the client. We suitable hold Public Liability insurance for this contract. Copies of which can be seen if required.
We will generally require 2 weeks’ notice to commence work, but we will confirm a date when the clients indicate that they are ready for the work to be started.
Subject to clear weather conditions, the work will take 2 weeks to complete. – We do not accept any deductions in the price of the work due to bad weather.
To accept this quotation, please sign and date one copy in the space below, then return it to us. Keep one copy for your records.
This is just one example of how a quote can be formatted. Each one will be different. The important thing with any sort of contractual agreement is to try to make sure you “cover all the bases”, so that there is the least possible “wriggle room” for any unscrupulous contractors or cowboys to try to take advantage of.
The “tighter” you can get the quotation, the more relaxed you will feel because you won’t be worrying that you are going to get “stung” at sometime during the works.
The example quotation given above IS actually, in legal terms a simple “contract”. In other words, it is a legal agreement, it has “covered all the bases” and it holds both parties to certain obligations related to the project. Note: If you intend to use it as a basis from which to create your own quotes / contracts, it will need to be modified to suit your own situation.
As you move up the scale of complexity and price involved in a project, the work tends to get more involved and complicated.
As the project gets bigger, you will usually find that a “Fixed Price Quotation” will become impractical because it won’t be detailed enough to “cover all the bases”. - That’s when you need to start to think about a “formal contract”.
A “Formal Contract” is basically just a more elaborate form of what you see above. But instead of everything being written on one sheet of paper, it is made up of various parts. There will normally be:
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1) The Contract itself, which is the “legal document” that is going to bind both parties once they sign it. This may include the payment terms, and general “Terms and Conditions”.
2) A specification of the works to be done. – Detailing clearly every item of work, the materials to be used, the methods of construction, and anything else needed.
3) The “Contract Drawings and Documents”. - All the relevant drawings and other information needed to allow the Contractor or Sub Contractor to be able to fully price the work.
This may all sound a bit complicated, and basically it is! – I have not given an example of a contract in this article for a good reason. – They are all different and unique, just as each project is different and unique.
Any attempt I made here to give you a standard for of contract which would cover your contract would be doomed to failure. - What you need to do is to make sure that any contracts you prepare are suitable for the work involved in your particular project.
If you employ a Project Manager, he / she may be able to help you here. Alternatively you could approach your Solicitor to ask if they can draw something suitable up for you. – If they can’t they will probably know someone who can. – Many Builders will have their own contracts, and the larger Package Build or Turnkey companies will probably have their own legal dept. – Whoever you go with, it’s always a good idea to pass the contracts in front of your own Solicitor before you sign it.
The important thing to bear in mind with Self Build, Renovation, or any similar sort of “amateur” projects is to make sure that you are legally covered against others defaulting on the agreements you made prior to them starting work.
People fall all the time on these “one off” projects (where everyone is, to an extent making it up as they go along). Disputes are commonplace over what the different parties think they should and should not be liable for, and disagreements over the amount of payment due can often arise.
The chances are that you as clients, are not experts in this field, and the chances are that the Contractor or Sub Contractor are doing this sort of thing every day. – If you don’t cover yourself properly, they could “run rings” round you!
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Fixed Prices:
As the above sample quotation shows, a fixed price is given as an indication of “How much the work will cost, if it is done exactly as the drawings, in accordance with the terms of the quotation, and within a given time period”.
Fixed prices are actually very rarely fixed!
In most quotations and contracts there will always be clause which allows for the fixed price to be altered! – I would be very surprised if more than about 10% of work done on a fixed price contract actually ends up costing the amount originally quoted! – Unfortunately unexpected things happen!
However, a fixed price quote is an important place to start when you are trying to set out “who does what” and “who gets what”. It also gives you a “base line” from which any changes the original price can be based.
One thing you should avoid at all costs is giving a job to a sub contractor based on a verbal quote from him of, for example: “About £1500 – probably”!
You can pretty much guarantee that if you follow that method of agreeing payments with the people who work on your project, the price you pay will not be the price you verbally agree! If your contractor or sub contractor insists on working in that manner and won’t sign a quote or contract, you should seriously think about using someone else. – letting anyone work on a verbal quote justt gives them “free range” to come up with any excuse they can think of to increase the price as much as they like.
Getting the fixed price, for a set amount of work, in a set time to a set quality, is SO important, if you want to give yourselves the best chance of getting the job done right and keeping your bank balance healthy!
Deposits:
This is almost a “swear word” to me! – If anyone ever starts to talk about “Deposits” for working on a building project,the hackles start to stand up on the back of my neck!Deposits should not be needed on general building contracts of the size that we are talking about with “Self Build”, “Renovation” or “DIY” projects.
Shops don’t charge their customers a deposit to stock the shop before they come and buy anything! – So why should builders charge a deposit before they start work? – If they haven’t had to spend a significant amount of money in the “pre construction period”, they shouldn’t need a deposit.
Most builders use merchants accounts for purchasing materials and they will pay for the goods up to 2 months after taking delivery. - They will pay their staff either weekly or monthly, but AFTER they have done a week’s or month’s work first. They should have enough of a financial buffer to cover a couple of week’s wages for “the lads” before needing money from you.
If they haven’t go such a buffer, ask yourself are they the right people for the job?
There are, however exceptions to this “no deposit” rule, for example:
If there are “specialist” elements which are the choice of the client, which may be expensive and need to be specially ordered “up front” then a deposit can be justified. - But in general, to my mind, deposits should be looked upon as a “No No”!
If anyone does ask you to put money down before work starts, ask them why? And make sure you get any payments made, covered by proper detailed receipts which include wording to say that you will receive the deposit back if anything goes wrong from the Contractors side.
Retentions:Where “Deposits” is a bad word to me, “Retentions” is a good word! – Wherever possible you should build them into all quotes and contracts.
Retentions are simply a “buffer” for you as the client.
They help to make sure that the Contractor or Sub Contractor does the job they have agreed to do in the way that they said they would, and that their work is of a reasonable quality.
Retentions are normally an amount equal to 5% of the contract sum or the sum actually paid to the contractor, whichever is highest.
That is the amount of money kept from the each payment made to each contractor. - It is a small amount of money which the contractor has to agree to being retained by the client, which says “I’m doing the job properly – If I’m not, then you get to keep this money”
By the end of the contract the 5% can add up to a significant sum. 5% of £100,000 is £5000. – That is a reasonable enough “chunk” of the profit margin to make the contractor want to get it back!
Retentions are normally held for 6 months. - If after that time there has been no problem with the work done, and there has been no reason to pay anything out which you would not expect to, the retention is released in full.
If however you have maybe had a leak in the plumbing system which has caused damage, or doors don’t close properly, stairs creak, or anything else that you feel should be paid for by the contractor, you return the retention, LESS the amount you have had to pay out to get the problem fixed.
Contractors and Sub Contractors are notoriously bad at “coming back” to completed contracts. That doesn’t necessarily mean they are “bad contractors”, it usually just means they are “busy contractors”! BUT, - it’s amazing how holding a bit of their money can make all the difference in the response!
It’s a good idea to try to build “retentions” into any job over around £1000. Under that figure and the amount of the retention is insignificant and can be more trouble than it’s worth.
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