9 Tips for Best-in-Class Builder Contracts
Builder contracts are such a fundamental part of construction risk management we tend to take their role for granted. At some point—two, five, ten years ago?—you probably sat down with your attorney. Maybe you purchased a template from your local trade association. You reviewed Massachusetts’ requirements for residential contracting agreements. Now your standard language addresses these components, along with the most common risks builders tend to encounter.
In a more predictable world, this level of planning might be enough. But today’s world, as we all know, is highly unpredictable, which means effective risk management requires a more nuanced approach. It requires ongoing review and active fine-tuning, sometimes at the individual project level.
So before digging into your next home build or remodel, here are nine tips for optimizing your builder contract and your MA builders insurance: two key elements in a solid risk management strategy.
1. Add your branding to your builder contract
This first tip has less to do with risk, and more to do with perception. But Lee Atwater was right when he said “perception is reality,” especially in the minds of consumers. So, it’s an important point in today’s market of informed buyers and ubiquitous competition. Delivering a polished document, with your company logo on it—versus downloading a generic contract off a website, for example—is a great opportunity for you to differentiate yourself. Clients may be more inclined to work with (and recommend) a builder who has invested in comprehensive branding—literally putting his “seal” on the best practices and terms of service outlined in print.
2. Don’t be afraid to customize
Contracts are an opportunity for builders and clients to set expectations, early on, while the relationship is mutually positive. According to construction/contractor attorney Andrea Goldman, of Goldman Law Group in Boston, contracts should represent a “meeting of the minds.” Builders and clients should be free to customize terms and language, so both parties are one hundred percent on board with how the job will work. (It is always advisable to have an attorney draft and/or review your contract.)
3. Explain additional insured status to clients
Builders and clients planning any ground-up construction or sizeable renovation (projects $1K+) need to exchange a signed a contract. Baked into that contract, it often makes sense for property owners to request additional insured status. Essentially, the additional insured endorsement extends your general liability coverage to the property owner. If a third-party injury or property damage occurs, your insurance policy responds, rather than the property owner’s.
Savvy clients know well enough to ask for this endorsement, but savvy builders should do more than just paste it in. Clients need to understand this extension of coverage is sometimes more complicated than adding a blanket endorsement. It’s important to discuss the distinction between “ongoing operations” and “completed operations,” as well as if/how the client’s additional insured status should be achieved with subcontractors. By reviewing specific terms with your builder’s insurance agent, you can educate your clients and allocate risk ahead of any potential losses.
4. Pay attention to Builder’s Risk Coverage (even if your client is purchasing it)
Your client’s home insurance is only designed to cover their existing structure, not the building materials or temporary hazards that go into a revamp.* Consequently, builders and property owners are well-served by a builder’s risk policy, which covers project materials (lumber, stone, millwork, etc.; on site, in transit, or in temporary storage) as well as covered property damage to the ongoing construction. You’ll want to ensure these coverages—and who is buying them—are clearly outlined in your contract.
According to standard building contracts from a variety of construction associations, the task of purchasing builder’s risk insurance typically falls to the owner. And many builders prefer it that way. Meanwhile, if the coverage isn’t purchased (or if it’s lacking in essential terms and breadth), there’s a good argument that you’d be left holding the bill. So, it pays to take an active role in how this coverage is structured, along with your agent’s input.
*Technically, homeowners’ policies can step in to address certain building material losses, if properly written for the value of materials, but the coverage isn’t as comprehensive as what’s available through a builder’s risk policy.
5. Make reasonable requests of subcontractors
Chances are good you are familiar with indemnification clauses in your sub contracts. But when was the last time you reviewed exactly what you’re asking of your partners? Some builders lean toward unrealistic terms, while others leave the door open for flawed-design gaps (more on this below) that can cause significant financial loss. There are limits to what your subs’ GL policies can provide. To prevent disasters, be clear in what you’re asking, and make sure it’s realistic for your sub to provide it.
6. Understand additional insured clauses and endorsement forms
Beyond the indemnification requirement, contracts should also contain an additional insured clause, requiring that each sub name you as an additional insured—for both ongoing and completed operations. Keep in mind that additional insured endorsement forms have evolved over the past 30 years. The scope of coverage for GCs has diminished with each revision. Adding to confusion over these historical iterations of standard ISO endorsements (1985, 2001, 2004), dozens of nonstandard endorsements can further muddy the waters.
So which version of the endorsement should you ask for? It’s more realistic to opt for the newest edition, which puts less burden on subs. (Older versions are difficult or impossible for most contractors to secure, according to the International Risk Management Institute.) In our opinion, it’s not worth making onerous requests that will potentially compromise relationships with your valued partners.
7. Require professional liability coverage
While being mindful of what you’re asking, it’s vitally important your contracts state which types of insurance your subs should have. Design error, for example, is a risk that lives outside the bounds of general liability coverage. If a project presents any potential for design error (and all design-build projects do), any subs who work closely alongside the construction would probably want to have a professional liability policy. (You, as the GC, should also hold a professional liability policy if you don’t already.)
8. File a mechanic’s lien in conjunction with a signed builder contract
A contract serves many purposes, but maybe none as important as ensuring you will eventually get paid for your work. Here’s where a mechanic’s lien (a.k.a. a contractor’s lien or a construction lien) comes into play. A mechanic’s lien basically says that you, a builder or a subcontractor, have a security interest in your client’s property. In Massachusetts, mechanic’s liens are a statutory right afforded to builders by statute.
According to Massachusetts law, any contractor who provides labor or materials for the “construction, alteration, repair, or removal” of a structure on land (or the land itself) is entitled to mechanic’s lien protection. That said, you must have an executed contract in place with the homeowner before this entitlement applies. You must also follow specific procedures in order to leverage this strategy.
9. Choose the right partners for legal and insurance advice
You’ve heard the old pejorative, “jack of all trades, master of none.” As a builder, in fact, you probably encounter real-life examples quite often: contractors who claim the ability to tackle any type of job—from roofs, to masonry, to landscaping—but lack the expertise to deliver anything exceptional.
Professional service partners are no different. Attorneys have niches; yours should focus on construction. Attorneys who are associate members of builders’ trade associations are far better equipped to draft contracts with the most updated terms and provisions. Likewise, GCs and subs need an insurance agent who specializes in construction. Such agents are equally well-versed in insurance language within building contracts; they understand what’s being asked and they can ensure your insurance program complies.
Bottom line, when it comes to builders’ contracts and insurance terms, these three rules of thumb will serve you well: Keep it relevant. Keep it realistic. And choose business partners (attorneys and insurance agents) who specialize in your industry. If you’re looking for more personalized advice on your contracts or insurance coverage, we’re happy to help. Contact us at 508.339.2952.