In recent posts on my Construction Law Musings blog, I've discussed the need for clarity of contract, trusting your gut, and assuring that your contract has the necessities. All of these bits of advice (along with my usual advice of working with an experienced construction attorney) are true with regard to commercial construction contracts and apply tenfold in residential construction (read working for a single/family owner on his house). With a residential project, you, as a construction contractor, are likely to be dealing with the difficult combination of an owner with little or no experience relating to how a construction project is supposed to work and an owner who is emotionally invested in the project because it's their home.
Because of the above, and the fact that your project is likely the biggest single investment that the owner has made outside of possibly a prior house, the residential owner will likely be looking over your shoulder and may very well attempt to negotiate down some of the costs as the project moves forward. The problem with this is that typical customers 1) don't know how much the project truly costs the contractor, and 2) feel that because they hold the cash, they can and should have some control over the individual costs of the construction—thus making those costs, and by extension, their contract, negotiable right up until the end.
This set of circumstances can create the “perfect storm” for a residential contractor. One good way to shelter yourself as much as possible from much of this storm is to use a fixed price where possible and a very strict allowance-based system where such pricing will not work. Why do I say this? Because when the owner accepts a fixed price for the work, that owner does not have the right to “look behind the curtain” and nitpick the costs and your overhead/profit structure. When the owner asks for this information, you can, and should, politely yet firmly tell them that how you arrived at the number is no business of his because of the fixed price. (Of course, with allowances, the owner picks the item and you apply the markup to that item, so the owner should have no reason to complain.)
If the owner gets upset by such logic, simply state that both sides agreed on the price and that the risk of loss on this score is with the contractor. The owner knows what it will pay. If you, as the builder, miscalculate the cost, you lose money. Hopefully this will allow the discussion to end quietly, if not amicably, and you will have defused one bit of ammunition with which an owner can try and whittle away your profit. Of course, I, as a lawyer, leave it to you, the contractor, to assure that the fixed price is as it should be.
You know your construction business better than does the typical residential owner. Stick to your guns and keep your pricing information to yourself. You’ll be glad you did.
This article originally was published May 27 in Hill's blog, Construction Law Musings. Republished with permission from the author.