Renovation contracts. A contract is a legal agreement between you and the company you hire to do your renovation. It sets out the roles and responsibilities of both parties. Given the wide variety of renovation jobs out there, it’s no surprise that different types of contracts have been created to deal with them. For this reason, contractors generally choose between two broad contract types each designed to benefit the homeowner and the contractor, depending on the scope of work and the size of the budget, which makes sense. After all, replacing a broken door-hinge is a lot different than building an en-suite bathroom.
First type of reno contract: Time & Materials
For smaller or piece-job work, most contractors rely on a Time & Materials (T&M) contract.
In this simple arrangement, contractors will provide regular invoicing for materials needed (in the case of the hinge example, new screws and a new hinge). In order to make a profit, the contractor adds a management fee for his time. The standard management fee is between 20% and 23%, explains Robert Koci, a former reno contractor and the publisher of Canadian Contractor, a magazine geared towards general contractors (GCs) and residential renovation companies.
T&M contracts make sense for a few reasons. For instance, homeowners may find it difficult to find a competent and cost-effective contractor to complete a few small tasks, such as hanging a light fixture or replacing a window insert in a door. But by grouping small jobs under one contract, the homeowner has a much better chance of attracting a reputable, knowledgeable contractor. To price these jobs fairly — so that a homeowner doesn’t overpay and the contractor still earns a living — most GCs will opt to use a T&M contract.
The use of T&M contracts isn’t just for small handyman tasks. These contracts can also be used for larger jobs, such as a bathroom renovation or the installation of flooring and windows. Sure, these might be big updates — and costs — for homeowners, but they are considered smaller jobs by most professional contractors. As such, contractors that take on this work only agree to if they know they can earn a certain dollar figure per hour of work. While it may seem unfair that a management fee is also charged, just remember that every contractor must pay workers’ compensation fees, insurance, additional taxes and administrative fees. Also, keep in mind that a great deal of a GCs job isn’t about swinging the hammer. It’s about being on the phone and going to the supplier to make sure materials are ordered and scheduled for delivery, that tradespeople are lined up and that municipal inspectors are booked at the right time.
When opting for a T&M contract keep in mind the following:
- Homeowners will usually pay a higher per square foot cost for the reno, repair or update than in a fixed contract;
- However, the overall cost of the T&M contract is usually substantially lower than a fixed contract because it’s a piece-meal agreement. You are only paying for work performed and materials used.
- T&M contracts are great for homeowners with a very strict budget or want to limit renovations or upgrades to very specific rooms or tasks.
Second type of reno contract: Fixed Contract
When it comes to larger projects, a Fixed Contract is standard.
A fixed contract is inclusive of all labour, materials and procurement. Koci said an initial deposit is made, followed by a payment schedule tied to major milestones. For instance, if your fixed contract includes finishing a basement, you will provide an initial deposit to your contractor to start the job and no other money until the framing is complete, and another when the bathroom is complete, and so on. Fixed contracts provide a level of security for both contractors and homeowners — both are reasonably assured of the others’ commitment and have a document that specifically states the scope of work and the all-in cost.
When opting for a fixed contract keep in mind the following:
- Homeowners will usually pay a lower per square foot cost for a reno or update with a fixed contract. Consider it the economies of scale in reno world. The larger your job, the more that’s required and the more expensive the project. But contractors like this as it guarantees work (and wages) for a specific period of time and, as a result, most will provide an overall cheaper square footage reno cost in an effort to compete for your business.
- Fixed contracts are set as soon as you sign the document. That means that any changes along the way are extras. Don’t like where that fireplace was installed and want to change it? That’ll cost you. Don’t like the tile you originally picked out for the backsplash and want to remove and replace it? That’ll cost you. Any change, no matter how small or big will end up costing you extra in a fixed contract. That’s because your contractor quoted you a fixed price based on a fixed amount of work. If he or she has to go back and change or modify something that can either impact the overall build or it can add extra time and material costs to the job — costs that were not accounted for in the all-in price quoted in the contract.
- If you do decide to make changes, expect to sign a “change order” request. This document (usually a one-pager) simply outlines the extra work and/or materials required and the cost you must pay to get this extra work completed. By signing the document, you are officially asking the change to be completed and agreeing to foot the costs.