Residential construction contracts will often contain technical terms or jargon that leave many homeowners with uncertainty. Homeowners should be cautious of implicitly agreeing to language they do not understand when entering a construction contract. As a primer, the following are some words commonly found in residential construction agreements that homeowners should understand before entering into an agreement.
DEFENSE and INDEMNIFICATION
A Defense and Indemnification provision is often found in construction contracts. Generally, it means that one party agrees to protect another party from certain damages or costs. For example, if a general contractor agrees to defend and indemnify the homeowner, that means that the contractor will cover the owner’s costs if the owner were to incur expenses in defending against the claim (and ultimately damages if a judgment is entered). The Defense obligation is triggered when there is an event that requires one party to defend a claim from a third-party. In this context, it would arise when a claim is made against the homeowner by a third-party because of the actions of the general contractor. If the provision applies, the general contractor would be responsible for paying for the homeowners’ legal expenses to defend the claim. The Indemnification obligation arises when there is a judgment obtained from those claims. In residential construction contracts, a Defense and Indemnity provision is often included to cover claims related to injuries on a jobsite, damage to property, or legal fees related to a subsequent lawsuit.
RETAINAGE
In the construction context, retainage is when a percentage of payment is held back (or retained) for purposes of ensuring that the contractor will fulfill his obligations under the contract. It serves as a financial guarantee that contractors will complete the project as agreed upon. While retainage is often a standard practice, the terms and the amount of retainage can be negotiated between owner and contractor.
SUBSTANTIAL COMPLETION
Substantial Completion marks the point when a project or a significant portion of the project is sufficiently complete for the owner to use it for its intended purpose, though this term may have a specific contractual definition. For example, a residential home construction contract may define substantial completion as the point when the certificate of occupancy is issued, which means that the home can be occupied. Substantial completion is different from final completion, where all work, including punch list items is completed.
ADR OR ALTERNATIVE DISPUTE RESOLUTION
An alternative dispute resolution or ADR provision will dictate the process for resolving and/or settling disputes and disagreements between the parties to the contract. It typically establishes the process for how to resolve the dispute and often will require mediation (a voluntary process where a third-party is used to assist in the resolution of the dispute) and/or arbitration (a binding process with the same authority as a court). These provisions are typically used to address the needs and interests of the involved parties.
