Construction Basics for Owners: Contract Sum, Owner Financing, and Payment Process

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["b"],["i"],["strong"]],"sections":[[1,"p",[[0,[],0,"May 4, 2022"]]],[1,"p",[[0,[0],1,"Contract Sum"]]],[1,"p",[[0,[],0,"The contract sum is the amount that\nthe owner will pay to the contractor. The contract sum includes all items and services\nnecessary for the proper execution and completion of the contractor\u2019s work, and\nit is subject to\nadditions and deductions as provided in the contract documents. "]]],[1,"p",[[0,[],0,"The contract\nsum may include allowances, which are amounts for\nitems that are not specifically determined at the time of entering the\ncontract, but that are included in the contract sum. For example, a contract\nfor a kitchen remodel may include an allowance of $5.00 per square foot for the\nbacksplash material. This means that the total contract sum includes $5.00\ntimes the number of square feet needed. If you chose a material that does not\ncost as much, the difference would be deducted from the total cost at the end\nof the project. Conversely, if you chose a material that costs more than the\nallowed amount, you would be billed for the difference. "]]],[1,"p",[[0,[],0,"The contract will typically allow for\nchanges to be agreed upon between the owner and the contractor that arise\nduring the course of the work and that impact the contract sum. This is usually\nthe result of an unforeseen circumstance, such as if a specified material\nbecomes unavailable. The contractor may suggest a substitution that requires a\ncost adjustment and ask for the owner\u2019s approval of that change. Ay such\nchanges to the contract sum should be agreed upon in writing to avoid misunderstandings\ngoing forward. "]]],[1,"p",[[0,[],0,"For a single family residential or\nsmall commercial project, the contract sum is usually a fixed price, sometimes\nalso called a stipulated sum. The price for the project would be a total\namount, such as $50,000.00. As noted above, the contract sum might include\nallowances. The cost for certain portions of the work might also be listed in\nthe contractor\u2019s proposal, including costs of subcontractors, such as plumbers\nor electricians. "]]],[1,"p",[[0,[],0,"There are other methods that are used to\ndetermine the contract sum in construction projects, such as cost of the work\nwith a fee, but those are generally for more complex projects. If you are\nentering into an agreement that is not for a fixed price, the contract should\nclearly state how the contract sum is determined. "]]],[1,"p",[[0,[0],1,"Owner Financing"]]],[1,"p",[[0,[],0,"Owner financing for construction of a\nsingle family home or a small commercial project is often obtained through a\nconstruction loan. A construction loan, as opposed to a mortgage, is a\nshort-term loan used only to finance the project. It is beyond the scope of\nthis article to provide a comprehensive discussion of construction loans. You\nshould consult with lenders for further details if interested in a construction\nloan. For smaller projects, like a\nremodel, the owner might use cash, a home equity loan, or a home equity line of\ncredit."]]],[1,"p",[[0,[],0,"Sometimes the contractor may want\nassurances that the owner has sufficient funding to pay for the project. The\nowner\/contractor agreement may include a provision that addresses this issue. For\nexample, AIA Document A104-2017, Abbreviated Form of Agreement Between Owner\nand Contractor, contains a provision that permits the contractor, prior to commencement of the work, to\nask the owner to furnish reasonable evidence that the owner has made financial\narrangements to fulfill the owner\u2019s obligations under the contract. The contractor\ndoes not have to start the work until the owner provides such evidence. "]]],[1,"p",[[0,[0],1,"Payment Process "]]],[1,"p",[[0,[],0,"There are different ways that payments\nmight be made during the course of the project. The contractor might submit\npayment applications at monthly intervals, detailing the work that was\nperformed during that month. The amount of each monthly application is part of\nthe contract sum. If an architect is providing contract administration\nservices, the architect will review the payment application and recommend to\nthe owner whether to pay the application in whole or in part. If there isn\u2019t an\narchitect involved in the payment process, the owner or the construction lender\nwould review the contractor\u2019s payment application. "]]],[1,"p",[[0,[],0,"Another method of payment that might\nbe used is payments due at completion of construction milestones. For example,\nin a renovation project, milestone dates might be completion of demolition,\nframing, hanging of drywall, etc. A payment might be due at each of those\npoints. "]]],[1,"p",[[0,[],0,"Payments might be conditioned, by the\nowner or by the construction lender, on the contractor providing certain\ndocumentation such as waivers of liens or manufacturers\u2019 warranty documents. Any\nsuch requirements for payment should be specified in the owner\/contractor\nagreement. The agreement should also specify how many days the owner has, after\nreceipt of an invoice or payment application, to make the payment. This is\nimportant because, if the owner does not make timely payments, the contractor\nmight have the right to stop the work or terminate the contract. "]]],[1,"p",[[0,[0],1,"Conclusion"]]],[1,"p",[[0,[],0,"You want to\nbe sure that you understand the contract sum and the payment process, and that\nyou have adequate financing for your project. These items are crucial to your\nability to have a complete and successful project. "]]],[1,"p",[[0,[],0,"Our next\narticle will address the issues of rejection and correction of work. "]]],[1,"p",[[0,[1],1,"Susan Van\nBell, Esq. was Senior Director of Content for AIA Contract Documents for over\nten years. She is currently a consultant. "]]],[1,"p",[[0,[2,1],2,"AIA Contract Documents has provided this\narticle for general informational purposes only. The information provided is\nnot legal opinion or legal advice and does not create an attorney-client\nrelationship of any kind. This article is also not intended to provide guidance\nas to how project parties should interpret their specific contracts or resolve\ncontract disputes, as those decisions will need to be made in consultation with\nlegal counsel, insurance counsel, and other professionals, and based upon a\nmultitude of factors. "]]]]}