New Construction: Essential Items to Review on Your Contract

You’ve decided to build a new home in Colorado Springs and it’s time to sign a contract to move forward. This is an exciting time! You’re probably already brainstorming which style and design preferences you want to incorporate into the construction of your new home.

Many new construction buyers assume that any problem or dispute will be solved with the sales assistant in the model home. But before you sign on the dotted line, it’s vital to remember that the salesperson does NOT represent you. They work for the builder and their best interests. Remember, your real estate agent’s commission is automatically built in the price of your new construction home. Make sure you hire trusted real estate professional to represent your best interests in this process.

Reviewing the builder contract is a significant step when entering new construction process. It’s essential to ensure that the contract comprehensively covers all aspects of the project while protecting the interests of both parties involved.

How to get started

• Print out the builder’s contract and compare the following tips to the contract.
• Mark any discrepancies and ask the builder about it. Ask for changes if the answer is unsatisfactory.
• The contract is written specifically for the builder by their lawyer. You might get some pushback if you ask for changes, but you should be comfortable with what you’re signing.

Related Reading:
Where to Find New Construction in Colorado Springs
Tips for Choosing a Builder
Things to Consider When Choosing a Lot
Common New Construction Terms
New Construction Checklist

Key items to review in a builder contract

1. Scope of Work: Clearly defines the scope of the project. This should include detailed descriptions of the work to be done, materials to be used, and the overall quality standards expected.
2. Project Timeline: Specifies the start and completion dates of the project, including milestones and key deadlines. This helps manage expectations and provides a timeline for completion. That said many builders have a clause in their contract that will allow for a 2 year time frame to complete a home. During the COVID years I did have a new construction client, who had to wait exactly THAT long to get their home finished. Those were special times, their home was also the very first house in the neighborhood and they were presold the home and it almost did not happen because this was when interest rates doubled.
3. Payment Terms: Clearly outlines the payment structure. Details should include the total project cost, any upfront payments, progress payments, and the final payment upon project completion. This section also defines how variations to the scope of work might affect the payment structure.
4. Non-refundable Deposits: This could include deposits for changes/optional items. Sometimes the contract may purport to say the seller retains certain deposits even in the event of a seller default.
5. Change Orders: If you want to make changes to the home or if any changes occur during the construction, it is common practice that change orders will be issued and display any new charges (or a credit in rare cases). You will want to know if there is an actual change order charge, how much it costs, and any changes that will impact the project timeline and cost of your new home’s completion.
6. Permits and Approvals: Specifies who is responsible for obtaining the necessary permits and approvals for the project. Clearly states any associated costs and timelines.
7. Insurance and Liability: Ensures that the builder has appropriate liability insurance and workers’ compensation coverage. Defines how liability for accidents, damages, or delays will be handled.
8. Warranties and Guarantees: Outlines the warranties on the workmanship and materials provided by the builder. This section should provide specifics about the duration and extent of these warranties, and the process for addressing any issues. Make sure you understand which parts of your home will be warranted directly through the manufacturer such as roof, windows and kitchen appliances, etc.
9. Dispute Resolution: This should be a clause outlining the process for resolving disputes, whether through negotiation, mediation, or arbitration. Defines the jurisdiction where legal matters would be addressed.
10. Termination Clause: Defines the circumstances under which either party can terminate the contract, as well as the procedures and potential consequences.
11. Indemnification: Clarifies the responsibilities of each party in terms of indemnifying the other against any claims, damages, or liabilities arising from the project.
12. Subcontractors and Suppliers: Specifies whether the builder will be using subcontractors or suppliers for certain aspects of the project. This section should define their roles, responsibilities, and how they will be managed.
13. Site Conditions and Access: Details the condition the site should be in before work begins. Also specifies the builder’s access to the site and any limitations or restrictions.
14. Communication: Establishes lines of communication between both parties. Should define how progress updates will be provided and how concerns or questions will be addressed.
15. Materials and Quality: Clearly states the quality standards for materials used in the project. This could include specific brands, models, or performance standards. After the COVID era price increases, it is vital to understand how changes in material cost will be handled.
16. Penalties and Bonuses: Consider incorporating penalties for delays and bonuses for completing the project ahead of schedule. Clearly define how these will be calculated.
17. Retention: Discusses retention amounts withheld from payments until the project is completed to the client’s satisfaction. This helps ensure any outstanding issues are addressed.
18. Intellectual Property: If applicable, addresses ownership of any design plans, drawings, or other intellectual property created during the project.
19. Environmental Considerations: Includes any environmental regulations or standards that need to be adhered to during the construction process.
20. Force Majeure: Addresses how unexpected events like natural disasters or other uncontrollable circumstances will be handled.
21. Contract Amendments: Includes a provision that outlines how any amendments or changes to the contract will be made and agreed upon.
22. Closing Based on a Temporary Certificate of Occupancy and/or substantial completion. During the pandemic and the resulting labor and supply chain disruptions, builders would finish homes on a temporary Certificate of Occupancy. That is certainly not ideal and should be used very carefully. It may be much harder to get the builder to fix and complete certain items on the house once the money has been disbursed to them.
23. Limited inspection rights;
24. Limited Title/Survey Evaluation Rights and limited or poor quality of title insurance (e.g., standard title insurance policy instead of extended coverage).
25. No meaningful buyer remedy for seller default:  Especially in an appreciating market, contracts will often state that the sole buyer remedy for a seller default is termination of the contract and the refund/return of some or all of buyer’s deposits – with an explicit waiver by the buyer of specific performance and any other rights/remedies

Other Important Items to Consider:

These items are not part of the builder contract, but are important considerations when entering into the new construction process.

1. Expansive Soils in Construction Projects: In construction projects, the presence of expansive soils can lead to potential defects. Specialized construction techniques are often required to minimize such issues and ensure the durability of the structure. You will receive soils test by a structural engineer for review.
2. Colorado Law’s Soil Analysis Requirements (C.R.S. § 6-6.5-101): According to Colorado law, before closing the sale of a new residence, builders or developers must provide buyers with crucial information. This includes a summary report of soil analysis and site recommendations. For sites with significant expansive soil potential, a publication detailing associated problems, construction methods to address them, and maintenance suggestions must also be provided.
3. Importance of Monitoring Disclosure Obligations: Buyers should actively monitor sellers’ compliance with these disclosure obligations to ensure they receive the necessary information about the property’s soil conditions.
4. Impact of Economic Conditions on Builders: Adverse economic conditions can lead to increased bankruptcy filings by builders. While bankruptcy doesn’t automatically void sales contracts, it often results in contract termination due to the inability of bankrupt builders to meet contract deadlines or complete the residence.
5. Risks Associated with Builder Bankruptcy: If a builder files for bankruptcy, the buyer’s earnest money and upgrade deposits could be at risk. Incomplete residences due to bankruptcy may lead to lost deposits. Buyers should be cautious about the inability of bankrupt sellers to fulfill warranties and post-closing obligations.
6. Considering Various Factors in New Construction Contracts: This list doesn’t cover all considerations for buyers entering new construction contracts. Consider seeking legal counsel before signing any contracts to ensure you fully understand your rights and obligations.
7. Conflict of Financial Disclosure: If you decide to use the builder’s lender, the builder will reach out to the lender for information on your financial qualifications. Sometimes they might ask above and beyond what is appropriate to retain your financial privacy. There could also be language in the contract speaking to that.
8. Keep Notes. When you are discussing changes in your construction, in the process or if any decisions are made, it’s very important to take notes, with date, time, place and people that were present. Doing this will assist you in keeping track of it all.

These details will give you a great start to make this the best experience possible and protect your interests along the way. We want to be a trusted resource for you in your home search or new construction process. We’re here for you every step of the way.  Ready to get started? Contact us: 719-219-9739 or email susanna@co-regroup.com.