Building Your Dream Theater: Step 2 - Homeowner's Guide to Construction Contracts 
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Written by Brian Kahn   
Monday, 01 August 2005

AV Education on RHT

Building Your Dream Theater:
Step 2 - Homeowner's Guide to Construction Contracts

Written by Brian Kahn

After you have selected the main players (installer, interior designer, calibrator, acoustician) for your construction team as described in Part One of this series of articles, you will need to negotiate the contracts that will govern their work for you. It is an understatement to say negotiating and drafting the contract documents is extremely important to the success of any home project be it an addition, a remodel or a dedicated home theater. The contracts will set forth the guidelines that outline everyone’s responsibilities and scope of work. In most cases with home theaters, the contracts come from an installer or retail firm and everything is, of course, negotiable. In the event that someone does not do what they are supposed to do, the written contract will provide guidance to the available remedies. Not that you are looking to sue anyone. You are, in fact, looking for the exact opposite – a deal between you and the people doing the work on your home or home theater system that leaves you happy with the results you want at the right price.

While contracts can, and most likely should, be signed by everyone hired to work on your house, this article will focus on your home theater installer and integrator. However, many of these concepts are relevant to other trades like a general contractor, electrician, plumber, etc. Any of your subs, including your contractor, architect or designer, may provide you with a “standard” or form contract for you to sign. Don’t just sign it blindly without careful consideration, as you will be bound to all of the terms and conditions set forth in the contract.

Standard Contracts
The form contracts used by many architects and designers have been drafted by or on behalf of industry associations. These contracts may appear to be evenhanded and fair, but they usually contain clauses that favor the contractor. You are not bound to use the industry form contract and should not be afraid to ask for changes to it. The question then becomes: what do you look for in a contract? Negotiating and drafting the contracts is definitely a good time to have an attorney involved. A relatively small amount of money spent on legal fees for reviewing or drafting a contract can save money, time and frustration later on. Most attorneys want you to sign on with an open checkbook philosophy. I recommend you dictate to your attorney, if you choose to use one in this situation, the amount of time you want him or her to look over such documents and or to make phone calls. Five hundred dollars, even by big city standards, should be more than enough to have someone look over the proposed contract and make sure you are entering into a fair deal. Inside that two hours, you might also get a phone call or two to finalize any little details between you and your contractors. You don’t want your attorney to be a pit bull about everything, but if your contractor isn’t willing to budge on things that irk you or your attorney, you are getting bad vibes on the first date that might suggest that you might want to interview other contractors. Despite the building boom right now, there are always other good contractors.

Getting To the Details
There are two methods of determining how much to pay your installer when building a home theater. The possible contract types are projects with a fixed price or contracts based on work to be performed on a time and materials basis. With a fixed price contract, the contractor agrees to perform a certain scope of work for a set price. Under a time and materials contract, the contractor agrees to do the work for the price of materials (usually with an agreed-upon markup) and time or labor at a certain rate. There is a variation on the time and material contract, known as the G-Max or guaranteed maximum. As the name implies, it is a time and materials contract with a lid on the price.

Each type of contract has its advantages and disadvantages. In a home theater, you might expect to see a T&M deal for a prewire, which sometimes is done before the main theater or multi-room installer is hired.

Most home theater installation contracts will be fixed price contracts. You and your contractor will decide what the scope of work is going to be, whether it is installing the wiring and components for a single theater system or a whole house audio/video and control system. Make sure the scope of work is set forth clearly and in detail. For example, is the equipment included? If so, make sure you specify who is providing exactly which equipment and the exact specifications of any particular components to be installed. The most common dispute arising from a fixed price contract is whether or not something was included within the scope of the contracted work.

Fixed price contracts are usually the way to go with a home theater install. Your scope of work must be clearer than “install XYZ brand plasma screen in living room” or “install whole house audio control system.” How should the screen be installed? What type of mount do you want? Should the wires be hidden within the walls? What type of control panels do you expect? Are you thinking wireless touch panel screens while your contractor is thinking wall-mounted keypads? Make sure the description is specific enough to keep everyone on the same page. Does the scope include programming and after-install instruction? What advanced or custom features are going to be programmed into the control system? The more trick you get, the more time it takes. The more time it takes, the more your system costs. If you want your entire CD library pre-ripped into a music server like a Sonos for multiroom use, make sure you get that bit of labor clearly written in your contract. It can save you a lot of time and trouble.

The contractor may and should include language in the contract to adjust the price if he runs into unforeseen obstacles, such as shear walls where none are specified in the plans. If your contractors are forced to do extra work through no fault of their own, they fairly deserve to be compensated for it. If multiple contractors are on site and the extra work is caused by another contractor, you should consider contractual provisions to back-charge the responsible contractor. The fixed price provision has recently protected one of my clients, who had a whole house control system installed. The contractor has had to come back numerous times to get the control system working. With a fixed price contract, the homeowner didn’t have to pay additional fees every time the programmer had to come back out to correct programming problems.

With either of the above type of contract, there is much more to the contract than just the scope of work and price. There are many other clauses to consider that will govern how the project progresses and how to resolve any problems that may arise. Specific insurance requirements should be spelled out in the contract for both contractors and subcontractors, including the types of insurance, amounts, additional insured endorsements and insurance requirements for subcontractors. On large projects, the homeowner should be named as an additional insured and obtain a Certificate of Insurance, showing the endorsement with the homeowner’s name on the document. This may seem paranoid, but it is not. Home theaters can cost $500,000 and way beyond. Asking an installer to add you as an additional insured is a very fair request if the scope of your work gets up there where the air is rare.
Another type of protective clause is an indemnity provision. An indemnity clause is where one party agrees to accept liability for another by agreeing to reimburse the second party for damages that may have to be paid to another if certain conditions are met. For example, your contractor may agree to indemnify you for any damage he/she or his/her subcontractors cause to a neighbor’s property. Contractors can also be protected by these clauses and should consider using them in their subcontracts. For example, if your home theater installer hires a high-voltage electrician who causes a fire, the indemnity agreement can protect your home theater installer. The important thing to remember is that it shifts liability, so if you see an indemnity provision, make sure you know what liability is being shifted and to whom Change Orders
During the course of the project, it is quite common for the plans to be modified. You may want to add something or make a change to accommodate a new piece of equipment or circumvent an unforeseen obstacle. Changes to the scope of work, including changes of equipment selection, should require written change orders signed by you the homeowner or your legal representative. This will protect you from having the contractor come to you at the end of the project with a bill, claiming verbal approval for “extras” you never knew about. Try to get a fixed price negotiated for each change order before you authorize the work, so you know what you are getting into. Often a change that appears simple is more complicated that it seems. For example, you may want to change out a component that hasn’t been installed yet to help you save on your overall budget. You won’t know until you discuss it with your contractor what type of work is involved. It is quite possible that the rack has already been built for the original component and the control system programming is already done. A general guideline is that a five to 10 percent increase in price will require a change order. This way, you don’t have to sign off on an additional volume control for zone 11 in the garage. However, if you want to upgrade from a $3,500 video projector to one that is $7,500, you will of course need to sign off before being charged. On larger jobs, this method of doing business is extremely common and protects both sides from potentially expensive misunderstandings.

Scheduling and Timing
Timing is always a critical issue with construction. The contract should include a construction schedule and a mechanism for adjustments, along with a promised completion date or duration of construction. There are many ways to encourage contractors to stay on schedule, including performance bonuses for early completion, liquidated damage clauses (a fee per day for late completion) and a savings-splitting clause, which can apply to both time and money savings. Savings-splitting and performance bonus clauses can reward a contractor for performing on or ahead of schedule and for saving you money.

Most contracts call for progress payments during the course of construction. The payment milestones and amounts should be clearly set forth in the contract documents. Progressive payments protect both the homeowner and installer. The installer is never out of pocket too much and the homeowner gets to make sure the work is being done properly before paying for it. Retention clauses should be considered when a certain amount, usually 10 percent of the progress payment that is actually earned, is held by the owner until the end of the job. This gives the owner some bargaining power when the job is completed to ensure that the contractor completely finishes all the miscellaneous or punch list items at the end of the project. To protect the contractor, a reasonable time limit should be set for payment of this final retention.

Problems After the Install?
After the project is completed, you may find something wrong with the contractor’s work and need an avenue for recourse. Traditional litigation in our court system is very expensive. A “simple” construction defect trial can cost $50,000 or more. Important options to consider in reducing the expense and risk are attorneys’ fee provisions, which allow the winning party to recover fees, and the use of alternative dispute resolution venues. Alternative dispute resolution typically consists of either mediation or arbitration and usually proceeds more quickly and can cost much less than litigation. The contract can govern whether alternative dispute resolution is required prior to litigation or even if it is to be binding in place of litigation. Certain rights are forfeited in exchange for faster and less expensive resolution, including jury trial and appeals, so this choice should be made carefully and in conjunction with the advice of an attorney.

It is likely a good idea to hire or at least consult with a lawyer when making major changes to your home or even your home theater, especially as home theater and especially home automation systems get bigger and bigger in terms of scope and price. With the tips listed above, you have an outline of some of the key elements you should understand before you enter into an agreement to have some major work done on your system and/or on your home. While some of the steps may seem overly cautious or even paranoid, they are designed to protect both you and your contractor from any problems. Your home theater should be the jewel of your home and, with the right steps to insure your success, it can be painless to purchase and have installed.

Brian D. Kahn is a partner in the Law Offices of Linda L. Northrup, A P.C. The firm, with offices in Los Angeles and Westlake Village, California, has been focusing on the areas of real estate and construction law since 1981.

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