After buying the property, the purchaser needs to comply with all applicable governmental regulations related to construction, occupancy, and ownership of property. These laws are almost exclusively state or local laws, although some federal environmental requirements may be applicable. The most common state and local requirements are for housing business licenses, rent control, building permits, and certificates of occupancy. The certificate of occupancy is issued at the other end of the project, when the construction is completed and the property is ready for occupancy. Again, the local government usually issues the certificate of occupancy. The certificate indicates that the local government has inspected the work and is satisfied that all requirements and conditions of the issuance of the building permit have been met and the property complies with all applicable housing and building codes. An experienced Salt Lake City Utah real estate lawyer plays an important role even during the construction of the project.
Settlement on the construction loan may take place simultaneously with the owner’s acquisition of the property, if the owner is prepared to begin construction immediately. Settlement on the construction loan will otherwise be delayed until the owner completes all the necessary construction documents, selects a general contractor, and secures all necessary work permits. An experienced Salt Lake City Utah real estate lawyer can assist you with the necessary construction documents.
Proceeds from construction loans, unlike acquisition and permanent financing, are provided to the owner through a series of “draws” or periodic requests for funds. For example, a construction lender may commit to fund a construction loan in a set amount, say, $1 million. This $1 million, however, will be lent to the borrower only after work is completed, the project architect or construction manager has certified that the work for which payment is requested is completed, and actual invoices for work performed are provided. The construction loan, like the acquisition loan before it, will have to have title insurance.
An experienced Salt Lake City Utah real estate lawyer can you with the contract you need to sign with the general contractor to construct the building. The contractor must review the agreement between the owner and the contractor (often referred to as the Owner-Contractor Agreement), the conditions of the agreement or contract, the drawings, the specifications, and all other documents related to the project which have been specifically incorporated into the contract documents. These would normally include all addenda issued prior to and after the execution of the contract, and any modifications such as change orders, amendments, and orders for minor changes to the work.
The contractor has to review these documents and to point out to the owner any errors, omissions, or inconsistencies that may exist. This due diligence on the part of the contractor is often known as the “duty to inquire.” In practice, however, this concept is not as clear as it sounds. The contractor normally reviews the contract documents for the first time during the bidding process. This may be for a period of only a few days or weeks. The documents themselves may have taken the architect and the owner months to prepare. From the contractor’s viewpoint, the owner and architect will have had sufficient opportunity and time to resolve any errors prior to submitting them for bids. To the extent that errors or inconsistencies exist, some contractors view them as a source of future cost increases through change orders. For others, this is an opportunity to assist the project by adding the contractor’s expertise and experience.
For example, assume that, in a renovation of an old building, the property lines are reflected on a tax map, which is incorporated into the plans as part of the contract documents. The contractor has the right to assume that these property lines are accurate and warranted by the owner and architect. Assume, however, that the contractor recently completed work on a similar building nearby and that the contractor knows that the building actually extends beyond the tax lot indicated on the map. The contractor may rely on the architect and owner’s warranty of accuracy, but the best approach for the project would be for the contractor to come forward with his or her recent experience to inform the owner of the potential problems with the site and the potential project delays that could result while the conflict is being resolved. If the contractor raises the issue early, the cost to the project likely will be minimized; if the contractor raises the issue after construction has begun, the cost to the project and the additional fees paid to the contractor likely will be substantial.
The contractor is normally selected for a project based on the contractor’s ability to construct the building within a certain time period and for a specified price. The contractor is solely responsible for all construction procedures and methods required to complete the job and for the supervision of all personnel, including subcontractors and specialty trades hired by the contractor. There is a tendency for some owners to get personally involved in the construction process, especially if the project is small or seemingly simple to build. This tendency is problematic for two reasons:
• It dilutes and confuses the liability and responsibility for construction means and methods which, by standard contract, lie solely with the contractor.
• Comments, recommendations, and changes suggested by the owner may carry the weight of amendments or change orders to the scope of work when carried out by a “hungry” contractor or one who aggressively seeks additional fees through change orders. The owner could then face an increase in project costs, rather than the savings that were anticipated as a result of the owner’s personal involvement.
Labor and Materials.
The contractor’s responsibility for all personnel hired for the project includes paying the labor, coordinating the various trades, and providing the necessary tools and equipment for the job.
The contractor must guarantee the materials used on the job and the labor of the contractor’s employees. This warranty is in addition to any applicable manufacturer’s warranties provided on appliances, heating/ventilating and air-conditioning (HVAC) equipment, or roofing. Owners should articulate in their contract agreements with the contractor that all warranties relating to materials and labor should be assigned to them and should further stipulate that all installation work is to be performed in a manner that preserves the manufacturer’s warranties. This stipulation usually requires the contractor to provide follow-up maintenance and adjustments to all warranted equipment for a specified period of time.
An owner also should negotiate from the contractor a warranty that the project will be free of liens or adverse interests in the property once payment for work performed has been provided by the owner to the contractor.
The contractor is responsible for all applicable taxes related to work performed or materials purchased for the construction.
Permits, Fees, and Notices
On a normal construction project, the owner is responsible for obtaining the building permit, and the contractor is responsible for all other permits and fees required to complete the work. In large municipalities, like New York City, the list of permits, fees, and notices required for a development can be extensive and may involve many different agencies and bureaucracies.
To differentiate between the contractor’s and the owner’s responsibilities for permits, fees, and notices, the standard contracts assign to the owner the obligation for everything prior to bidding and signing the contract, and to the contractor everything necessary once the contract is signed. The responsibility for these documents should be clearly expressed in the contract documents and, if possible, attached to a calendar or schedule so that all parties know who is responsible for what and when it will be provided. Occupancy of multimillion-dollar projects has been delayed for want of a single card or slip of paper that no one was responsible for.
This issue is of particular importance on jobs that are “fast-tracked”— work proceeds on some elements of the building while others are being designed and developed. High construction financing costs and limited availability of materials are two possible reasons for fast-tracking a project. For example, a housing project might use steel as a structural system. In some areas of the country, prefabricated steel must be ordered months in advance of delivery. A prudent owner might develop the structural drawings and order the steel prior to completing the preliminary design for the rest of the project. Knowing exactly who is responsible for the permits, fees, notices, and tests for steel construction would be essential to this project.
In every construction project, there are unknowns, just as there are conflicts and problems. Allowances are budget items that, for some reason, cannot be fully defined or specified at the time when the project is bid. The owner knows that these items will be used on the job and provides a budget amount to cover the expected costs. There is commonly a provision in the contract for an adjustment to the allowance amount once it can be fully defined. A typical allowance might be for wood beams in a renovation project, where the owner and architect have determined that some of the wood beams in the building will have to be replaced. However, without extensive demolition and testing of the existing beams, an accurate replacement cost cannot be established. An allowance is made for beam replacement, but it will be further defined and adjusted after demolition is complete. Contractors will calculate their bid for the project using this allowance amount as part of the contract price.
The contractor is a businessperson with a staff and subordinates or partners. The contract must provide that some individual on the contractor’s staff will be the superintendent for the project. It further provides that all communication with the superintendent shall be as binding as with the contractor directly. The superintendent is required to be in attendance on site during the construction process. This establishes a clear channel of communication between the owner and the contractor. There is no reciprocal clause for the owner other than direct communication with the project architect.
Contractor’s Construction Schedule.
The contractor must prepare a construction schedule immediately after being awarded the job. The standard contract provision states that the schedule should provide the “expeditious and practicable execution of the work” and shall be revised by the conditions of the work. These requirements are insufficient from the owner’s point of view, however, because they do not articulate the form, content, or level of detail necessary to properly manage a construction project. A prudent owner should modify this standard contract language to require from the contractor a detailed schedule that:
• Articulates the phases of construction.
• Establishes milestones that the owner can use to evaluate the progress of construction.
• Provides for revisions and potential delays.
This schedule will provide an agreed-on device for determining progress and a fair baseline for resolving allegations of delay. The schedule should be made part of the contract documents through incorporation into the construction contract.
Documents, Samples, Shop Drawings, Project Data
The contractor is required to keep these items at the project site for reference and review by the owner and architect and their agents. This is a useful requirement for several reasons.
First, the drawings, specifications, and shop drawings are constantly being revised to incorporate the latest changes to the work. These documents are dated with each revision, and the latest revision becomes the record copy. If work is completed from an earlier version that does not incorporate the latest change, serious cost increases and delays could result. By having the record copy on site, the architect can be assured that all changes to date have been incorporated into the actual work.
Second, many elements of a building are selected from catalogues by the project architect during the design and development phase of the project. Other elements are selected by what is known as a performance specification. This type of spec describes what the element is supposed to do without actually selecting a particular product or material. The contractor may select the particular product to be used, provided that it meets the performance standards of the specification. By having samples of these items on site, the architect and contractor can evaluate clearly any issue that may arise concerning their use on the project and expedite any approvals that may be required.
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