Residential Construction Contract Documents
The principal functions of a residential construction contract are to establish the terms of the construction agreement, such as price, description of the project, commencement and completion dates, warranties, and allocation of responsibilities, and to create a system for building, approving, and paying for the construction.
The Texas Constitution provides several consumer protection provisions relating to construction on homestead property. For a lien for the construction of improvements to be created against homestead property there must be a written contract. For remodeling or renovations the constitution requires a written application for extension of credit be submitted by the homeowners at least five days before executing the contract, unless the work is acknowledged to be necessary for the immediate repair of conditions that materially affect the health or safety of the residents of the homestead. In addition to this five-day application period, the owner has a three-day right of rescission following execution of the contract. For renovation or repair projects, the contract must also be executed at the office of the third-party lender extending credit for the work and material, the office of an attorney at law, or a title company office. Tex. Const. art. XVI, § 50(a)(5). See chapter 20 in this manual for a detailed discussion of these requirements. Forms 20-6 and 20-7 are closing certificates used to confirm compliance with these requirements.
This chapter contains a residential construction contract (form 18-4). Designed as a basic form, the contract specifies construction costs, a description of the property on which the new improvements are to be situated, a description of the plans and specifications for the project, and a completion date for the work.
Each transaction should be examined to determine if additional provisions are necessary. If form 18-4 is used to document a transaction in which the construction costs are financed, a comprehensive review of chapter 20 in this manual is needed. The attorney may also wish to consider including additional provisions, which are beyond the scope of this chapter, relating to such matters as work delays, responsibility for soil condition and design, loan commitment requirements, late charges, and delay damages.
§ 18.2:1Construction Trust Fund Statute
The Texas Construction Trust Fund Act (Texas Property Code sections 162.001–.033) states that contractors agreeing to do more than $5,000 worth of work must put the owner’s funds for each such job in a “construction account” at a financial institution. Tex. Prop. Code § 162.006. The general contractor becomes a trustee for the funds received from the owner for the benefit of the subcontractors and suppliers on the project. Tex. Prop. Code § 162.003. The builder’s profit on a cost-plus contract is not considered a trust fund. Tex. Prop. Code § 162.001(c). Misuse of trust funds of $500 or more with intent to defraud is a third-degree felony. Failure to establish or maintain a construction account in violation of sections 162.006 or 162.007 is a class A misdemeanor. Making a false affidavit that the contractor has paid the project bills is a class A misdemeanor with a possible penalty of up to one year in jail, a $4,000 fine, or both, and personal liability for loss or damage resulting from a false statement. Tex. Prop. Code §§ 53.085(d), (e), 162.032.
The attorney should also be familiar with the law of involuntary mechanic’s liens. See chapter 21 in this manual.
§ 18.2:2Texas Residential Construction Liability Act
The Texas Residential Construction Liability Act (RCLA), Texas Property Code chapter 27, controls key aspects of residential construction regarding defect claims. Analysis of the provisions of the RCLA is beyond the scope of this manual, although an overview of the RCLA is included below because of its applicability to certain requirements in residential construction contract documents.
RCLA Applicability and Notice: The RCLA applies to construction defect disputes involving a residence, which the RCLA defines as “the real property and improvements for a single-family house, duplex, triplex, or quadruplex or a unit and the common elements in a multiunit residential structure in which title to the individual units is transferred to the owners under a condominium or cooperative system.” Tex. Prop. Code § 27.001(7).
Notices Required in Contract: Contracts for home or residential construction must contain the statutory notices prescribed by the RCLA. The notice is included in form 18-4 in this chapter.
Dispute Resolution Requirements: Residential construction defect disputes are addressed by the RCLA. The RCLA requires owner claimants to complete several conditions precedent before filing suit or arbitration based on most residential construction defect claims. Certain limited types of claims are exempt from the RCLA dispute resolution process, including claims solely for personal injury, wrongful death, or property damage; cases of builder wrongful abandonment of the project; real estate fraud claims under chapter 27 of the Texas Business and Commerce Code; and violations of the Trust Fund Act (Property Code chapter 162). Tex. Prop. Code § 27.002.
The dispute process includes several steps, including advance notice to builders, opportunity for builder inspection of the claimed defects, disclosure to the builder of expert reports, and builder offers to repair. Tex. Prop. Code § 27.004.
§ 18.2:3Construction Anti-Indemnity Statute
Chapter 151 of the Texas Insurance Code prohibits an indemnity in a construction contract, or in an agreement collateral to or affecting a construction contract, to the extent that it requires an indemnitor to indemnify a party, including a third party, against a claim caused by the negligence or fault, violation of a law, or breach of contract of the indemnitee, its agent or employee, or any third party under the control or supervision of the indemnitee, other than the indemnitor or its agent, employee, or subcontractor of any tier. A provision in a construction contract that requires the purchase of additional insured coverage is void to the extent that it requires coverage that is prohibited under subchapter C of chapter 151. This subchapter does not apply to an indemnity provision in a construction contract, or an agreement collateral to or affecting a construction contract, pertaining to a single-family house, townhouse, duplex, or directly related land development, or to a public works project of a municipality. Tex. Ins. Code § 151.105(10).
§ 18.3:1Homestead and Mechanic’s Liens
Texas homesteads are exempt from forced sale except for the enforcement of purchase-money liens, property tax liens, an owelty of partition, the refinancing of a federal tax lien, mechanic’s and materialman’s liens, “home equity” or second-lien financing, a reverse mortgage, and the conversion and refinance of a personal property lien secured by a manufactured home to a lien on real property. A contract for new improvements or improvements to an existing home that create a mechanic’s and materialman’s lien against the homestead must be in writing, made before material is furnished or labor performed, signed by both husband and wife if the homestead is a family one, and compliant with other conditions provided in the Texas Constitution. Tex. Const. art. XVI, § 50; Tex. Prop. Code § 53.254. The contract must also contain the notice required by Tex. Prop. Code § 41.007. The residential construction contract, used alone, does not create a mechanic’s lien. For a more complete discussion of lien and financing issues, see chapter 20 in this manual.
Three basic price structures are used in construction contracts.
Lump sum or stipulated sum is the simplest type of contract price. The contractor reviews the plans and specifications for the project and contractually agrees on a fixed price for the work. Unless the parties agree to change this stipulated amount, this will be the amount paid by the owner.
A unit price contract establishes a price for a given unit of work (for example, $13 per square yard of asphalt paving).
A cost-plus arrangement establishes the price to the owner based on the actual cost of the work plus a certain percentage of profit for the contractor. In cost-plus, guaranteed-maximum construction contracts the contractor guarantees that the cost to the owner will not exceed a maximum price.
Commencement of construction before the contract is executed invalidates a mechanic’s lien on a homestead. Tex. Prop. Code § 53.254(b).
Giving owners an allowance is standard practice in residential construction. Both parties should take care to ensure products chosen by the owners are within the amount allowed by the contract. For instance, if an allowance provides for $1,000 for a refrigerator and an owner selects a refrigerator that costs $1,300, the owner has exceeded the allowed amount and owes the contractor an additional $300. If the owner decides to use a previously purchased refrigerator, the contractor owes the owner a credit of $1,000. Careful documentation of amounts spent can prevent future disputes.
Changes to the scope of a project should be documented through the use of a change order, form 18-6 in this chapter. Whether a contractual mechanic’s lien extends to such changes depends on the agreement of the parties as expressed in the original construction contract.
Without an agreement to the contrary, there is no contractual lien for partial performance on a homestead. The contract must be substantially performed. Fidelity Savings & Loan Ass’n v. Baldwin, 416 S.W.2d 482, 483 (Tex. App.—Beaumont 1967, writ ref’d n.r.e.).
Sales taxes are the responsibility of the owner unless the contract provides for a lump-sum price, in which case the cost is the responsibility of the contractor as the consumer. Tex. Tax Code § 151.056. If the contractor manufactures or produces and also places ready-mix concrete into the property, the concrete must be separately billed, with tax on the materials paid by the owner. Tex. Tax Code § 151.056(g).
Workers’ compensation laws apply to employer-employee relationships but not to independent contractors. Tex. Lab. Code §§ 406.121–.123.
The Texas Home Solicitations Transaction Act may apply if the consumer’s obligation is entered into at a location other than the contractor’s place of business. If the Act applies, additional notices are required. Tex. Bus. & Com. Code §§ 601.002, 601.051–.053. The statutory notice of cancellation is included in the residential construction contract (form 18-4 in this chapter).
In unincorporated areas of certain counties, a builder’s failure to provide the notice indicating all inspections of a new residential construction of a single-family house or duplex showed compliance with applicable building code standards constitutes a criminal offense. The builder has an affirmative defense if the builder’s failure to submit the notice is the result of the failure of the person who performed the inspection to provide appropriate documentation to the builder to submit to the county. Tex. Loc. Gov’t Code §§ 233.154–.155.
§ 18.3:4Owner Liability to Mechanic’s Lien Claimants and Owner Retainage
The perfection of involuntary mechanic’s liens is covered in chapter 21 in this manual. Before contracting for residential construction, owners should become familiar with their potential liability for mechanic’s liens. Owner liability for properly noticed and filed subcontractor and supplier mechanic’s liens is the sum of two amounts described in Tex. Prop. Code § 53.084. First, an owner is liable for the 10 percent statutory retainage owners are required to withhold from payments to the original contractor on every construction project. Tex. Prop. Code §§ 53.101–.103; Page v. Structural Wood Components, 102 S.W.3d 720 (Tex. 2003). In addition, an owner is liable for “fund trapping,” which means “trapping” or withholding remaining contract funds otherwise owed to the original contractor. This is required when the owner receives a mechanic’s lien notice letter containing language telling the owner to withhold payment from the contractor for the claim amount. Tex. Prop. Code § 53.056(b), (d). If an owner receives a lien notice letter containing the required fund-trap warning and fails to withhold payment from the contractor, the owner is personally liable and the owner’s property is subject to a lien for amounts paid after receipt of the notice. This fund-trapping liability is in addition to the owner’s liability for the 10 percent statutory retainage. Consequently, to protect the owner in case involuntary mechanic’s liens are asserted, the owner must do two things: (1) retain 10 percent of the adjusted original contract price throughout the duration of the project and for the time after completion provided for lien claimants to file mechanic’s liens and (2) withhold the proper amount of undisbursed funds (“trapped funds”) from the contractor if lien notices are received from subcontractors or suppliers. Tex. Prop. Code §§ 53.081, 53.084, 53.101. If an owner fails to withhold the statutory retainage, the owner is nevertheless liable for the amount that should have been withheld. Tex. Prop. Code § 53.103(a).
Time for Withholding Statutory 10 Percent Retainage: Owners, to protect themselves from mechanic’s lien claimant liability, should withhold payment of statutory retainage for at least the time allowed for claimants to file lien affidavits. Tex. Prop. Code § 53.057. This period of time is discussed in chapter 21 in this manual. However, an outline of the applicable time limits is provided below.
The retainage provisions affecting first- and second-tier claimants were amended by the 2011 Texas legislature. Owners must withhold retainage until the earliest of the following:
1.The lien filing date provided by Tex. Prop. Code § 53.052, which is the fifteenth day of the third month following the last month of work or delivery by the claimant. (See the chart at section 21.9:2 in this manual.)
2.The fortieth day after the date stated in the affidavit of completion for the original contract, but only if the owner sent the claimant notice of the affidavit. This affidavit of completion is provided for in Tex. Prop. Code § 53.106, which allows, but does not require, the owner to file such an affidavit stating the date of final completion for the project. See form 18-7. Notice of filing and a copy of the affidavit must be sent to claimants making a written request for one or to claimants who have sent out owner lien notices. However, regardless of whether a claimant makes a request for such affidavit or sends a lien notice, if the affidavit is not sent to a claimant, then the forty-day deadline described in this section does not apply to that claimant. The affidavit is prima facie evidence of the actual final completion date for the project if it is sent to claimants as required.
3. The thirtieth day after the day the owner sends written notice to the claimant demanding that the claimant file its mechanic’s lien affidavit. The notice must contain a legal description of the project property and the owner’s name and address, and it must specify that the lien affidavit must be filed within thirty days of the date the notice was sent. The “demand to file a lien” section of the Texas Property Code, Tex. Prop. Code § 53.057(g), provides that this notice is effective only for the amount of contractual retainage earned by the claimant as of the day notice was sent.
Owner Failure to Withhold 10 Percent Retainage: If the owner fails to withhold statutory retainage, then the claimants are entitled to perfect their claims by notice and affidavit within the longer deadlines described above (i.e., the fifteenth day of the third month following the last month of work or delivery). No thirty-day or forty-day deadlines, under Tex. Prop. Code § 53.057(f), are applicable if the owner fails to withhold the statutory retainage.
Summary of Owner Retainage Withholding Period on Residential Projects: In summary, for residential projects, owners are liable to hold retainage for the longer lien-filing period provided by Tex. Prop. Code § 53.052, meaning the fifteenth day of the third month following the last month of work or delivery completing the project. See the chart at section 21.9:2 in this manual. If an owner wants to shorten this time, he must send one of the applicable notices described above: either filing and sending an affidavit of completion (form 18-7) or sending notice to claimants demanding that they file their lien affidavits. Because the effect of the thirty-day notice to file lien is limited to the accrued amount of the claimant’s retainage, this notice is of limited use. Therefore, residential owners should consider the affidavit of completion process if they want to shorten the retainage withholding period. Owners are cautioned that only those suppliers and subcontractors who are sent the affidavit of completion are subject to the forty-day deadline. A second-tier supplier-claimant, delivering material at the end of the project and not known to the owner, will not receive an affidavit of completion, and therefore that claimant’s lien will not be cut off by the forty-day deadline.
Both property and liability insurance should be obtained by the contractor to insure the project, and the cost should be factored into the contract price.
Water and electricity should be provided to the lot line by the owner. If not, the contract should allocate the additional cost of obtaining service.
A survey should be performed before the commencement of construction, at the owner’s cost.
The Federal Trade Commission requires insulation installers and new home sellers to supply information on the efficacy of the home insulation products they sell. See 16 C.F.R. pt. 460. The residential construction contract, form 18-4 in this chapter, includes a section for providing the required insulation disclosure data.
Independent contractor status of the contractor reduces the risk of owner liability. Exxon Corp. v. Quinn, 726 S.W.2d 17, 19–20 (Tex. 1987). To help preserve the contractor’s independent contractor status, the owner’s control over the performance of the work should be limited.
Responsibility for the foundation is one of the most important risk allocation issues in a construction contract. Usually, the party who has the most control over the design of the foundation bears the responsibility for its performance.
If a contract that provides for the construction of new improvements to real property located in Texas contains a provision making the contract or any conflict arising under the contract subject to the laws of another state, to litigation in the courts of another state, or to arbitration in another state, that provision is voidable by the party obligated to perform the construction. Tex. Bus. & Com. Code §§ 272.001–.002.
Commencement of construction is required under the residential construction contract, form 18-4 in this chapter, to begin within thirty days from the contract date. The inception date of a statutory mechanic’s lien is the date that construction begins or materials are first delivered. Tex. Prop. Code § 53.124. This date may be established by filing an affidavit of commencement, form 18-5.
In the residential construction contract, form 18-4 in this chapter, delays caused by unforeseen circumstances extend the completion date. Delays caused by either party can be made the subject of monetary penalties. The price of the project may be adjusted for concealed conditions.
The contractor agrees to clean up the property following completion. The owner walk-through is intended to produce a “punch list” of items the owner wants completed or corrected by the contractor. Acceptance of work occurs only after inspection and approval by the owner. Evidence of completion must be provided by the contractor to the owner. Substantial completion occurs when a certificate of occupancy is issued. If no certificate of occupancy is required, substantial completion occurs when all improvements are sufficiently complete, in accordance with the construction contract documents, so that the owner may use or occupy the improvements for the intended purpose. If the owner moves into the improvements, the improvements will be deemed to be substantially complete.
Change orders occur only on agreement by the owner and the contractor. This agreement may be documented by form 18-6.
Alternative express warranty provisions are included in form 18-4 in this chapter, in paragraph E.1.e. Texas law implies a warranty of “good and workmanlike” construction, which can be disclaimed. Also, a warranty of “habitability” is implied, which cannot be disclaimed. See Centex Homes v. Buecher, 95 S.W.3d 266 (Tex. 2002); Melody Home Manufacturing v. Barnes, 741 S.W.2d 349 (Tex. 1987); Gupta v. Ritter Homes, Inc., 646 S.W.2d 168 (Tex. 1983); March v. Thiery, 729 S.W.2d 889 (Tex. App.—Corpus Christi–Edinburg 1987, no writ). In Centex Homes, the Texas Supreme Court held that—
the implied warranty of good workmanship may be disclaimed by the parties when their agreement provides for the manner, performance, or quality of the desired construction. We further hold that the warranty of habitability may not be disclaimed generally. This latter implied warranty, however, only extends to defects that render the property so defective that it is unsuitable for its intended use as a home.
Centex Homes, 95 S.W.3d at 274–75.
One of the alternative express warranties provided in form 18-4 refers to the Texas Residential Construction Commission (TRCC) warranties. These TRCC warranties provide detailed quality standards for residential construction. Although the TRCC was abolished effective September 1, 2009, the warranty standards previously developed by the TRCC may still be incorporated by reference. The TRCC warranties are available online at www.texasinspector.com/files/TRCC-Standards-of-Performance.pdf.
§ 18.7Instructions for Completing Forms
§ 18.7:1Contractor’s Disclosure Statement for Residential Construction Contracts
Form 18-1 in this chapter is mandated by the Texas Property Code. This statement must be delivered to the owner before the execution of the construction contract. Tex. Prop. Code § 53.255.
§ 18.7:2Contractor’s List of Subcontractors and Suppliers
Before beginning work on a project the original contractor must furnish to the owner a written list with the name, address, and telephone number of each subcontractor and supplier that the general contractor intends to use. See form 18-2 in this chapter. This list must be updated within fifteen days of the addition or deletion of a subcontractor or supplier unless the owner signs a written waiver of the right to an updated list. Tex. Prop. Code § 53.256(a). Specific language for the written waiver is given in Tex. Prop. Code § 53.256(d). To use the first alternative for payment of project retainage, described in form 18-4, paragraph 3.f. of exhibit A, the contractor must list all subcontractors and suppliers of any tier involved with the project, timely update this list, and furnish a final updated list on or before the date of final completion. See also the optional paragraph C.1.c. in form 18-4. The owner should recognize that if this alternative is selected and an affidavit of completion is not sent to a claimant for any reason, including that the owner was not made aware of the claimant, then the owner will be liable to that claimant for the claimant’s share of statutory retainage even though the owner may have already paid the retainage.
§ 18.7:3Contractor’s Disbursement Disclosure for Residential Construction
As a prerequisite to obtaining an advance of funds in a residential construction project, the general contractor is required to provide the owner with a signed statement listing the bills paid and to be paid. See form 18-3 in this chapter. If the lender is funding an advance directly to the contractor and not through the owner, that lender must provide the owner a lender’s disbursement statement and the contractor’s disbursement statement used to apply for the advance. Tex. Prop. Code § 53.258.
§ 18.7:4Residential Construction Contract
Form 18-4 in this chapter is a contract for the construction of a residence without an architect. The contract assumes a project in which the ultimate homeowner holds title to the land before the commencement of construction. Under the contract, the construction process and the duties and obligations of the parties are divided into distinct preconstruction, construction, and postconstruction stages. The principal functions of the contract are to establish the terms of the construction agreement, such as price, description of the project, commencement and completion dates, allocation of responsibilities, and so forth, and to create a system for building, approving, and paying for the construction.
§ 18.7:5Affidavit of Commencement
The owner and the original contractor may jointly execute and file an affidavit of commencement with the county clerk of the county in which the land is located. Tex. Prop. Code § 53.124(c). See form 18-5 in this chapter. An affidavit of commencement is prima facie evidence of the date of the commencement of construction and fixes the date of inception of the involuntary mechanic’s liens filed relating to the construction. Tex. Prop. Code § 53.124(d).
The affidavit should be executed and recorded within thirty days after the date of actual commencement of construction or delivery of materials. Tex. Prop. Code § 53.124(c). The owner and the original contractor should not execute this affidavit at the closing of the construction loan lest a delay in recording cause the affidavit to reflect a commencement date before the recording date. The owner and the contractor should execute and record the affidavit promptly after the construction loan documents have been filed and construction has actually commenced.
Form 18-6 in this chapter documents amendments to the residential construction contract that may change the plans and specifications, adjust the contract amount, or alter the completion date.
§ 18.7:7Affidavit of Completion
The owner may file an affidavit of completion with the county clerk of the county in which the property is located. See form 18-7 in this chapter. Completion is defined not as “substantial completion” as used in the contract but as “the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty work or replacement or repair of the work performed under the contract.” Tex. Prop. Code § 53.001(15). An affidavit of completion meeting the requirements of section 53.106 constitutes prima facie evidence of the date of completion. Tex. Prop. Code § 53.106(d).
The affidavit should be filed on or before the tenth day after the completion of the work. If the affidavit is filed following the tenth day after the date of completion, the date of completion is presumed to be the date of actual filing. Tex. Prop. Code § 53.106(d).
The owner must send a copy, by certified mail, return receipt requested, or registered mail, to the original contractor not later than the date the affidavit is filed and to each claimant who has sent the owner a notice of lien liability not later than the date the affidavit is filed or the tenth day after the date the owner receives notice. Tex. Prop. Code § 53.106(b). The owner must also furnish a copy of the affidavit to any person who furnished materials or labor for the construction and requests a copy. The affidavit must be furnished not later than the tenth day after the date the request is received or ten days after the date the affidavit is filed, whichever is later. Tex. Prop. Code § 53.106(c).
Forms 18-8 through 18-11 in this chapter are statutory forms required for lien and bond claim waivers to document final or interim acknowledgment of payments. The forms must be used verbatim, in lieu of any other form of lien release associated with construction payments. However, if a mechanic’s lien affidavit has already been filed in the real estate records, the form of release does not have to conform to forms 18-8 through 18-11. Tex. Prop. Code §§ 53.281–.287. Blanket advance releases of all mechanic’s lien rights of the contractor should be enforceable, if expressly stated in the residential construction contract and if the contract is executed before commencement of any work. Tex. Prop. Code § 53.282(a)(3).
The contractor, on request by the owner and as a condition of payment to the contractor, must provide the owner an affidavit stating that all of the contractor’s subcontractors, laborers, and materialmen have been paid or identifying those not paid. See form 18-12 in this chapter. The affidavit may include representations regarding bills to be paid with the funds received and indemnity provisions. Tex. Prop. Code § 53.085.
A bills-paid affidavit must be signed by the general contractor as a condition for final payment. Tex. Prop. Code § 53.259.
There are significant penalties, both civil and criminal, for the making of false affidavits. The penalties may include a $4,000 fine, confinement in jail for a period not to exceed one year, or both, and personal liability of the person signing the affidavit for any loss or damage resulting from the false statement. Tex. Prop. Code §§ 53.085(d), (e), 53.259(c), (d).
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Bush, Robert L. Russell, James W. Rudnicki, and Kathryn L. Koons. “Drafting Issues in Residential Construction Contracts.” In Residential Real Estate Construction Law Course, 2008. Austin: State Bar of Texas, 2008.
McQuality, Mark S. “Texas Residential Construction Claims: It Was Time for Change.” In Advanced Consumer and Commercial Law Course, 2009. Austin: State Bar of Texas, 2009.
St. Claire, Frank A., and William V. Dorsaneo III. Texas Real Estate Guide. New York: Matthew Bender & Co., 2001.
Texas Residential Construction Commission. “Limited Statutory Warranty and Building and Performance Standards,” effective June 1, 2005.
Walthall, Thomas J., Jr., and R. Wes Johnson. “Construction Contract Clauses & Retainage and Contingent Payment.” In Advanced Real Estate Drafting Course, 2009. Austin: State Bar of Texas, 2009.