Pre-Construction Agreements Explained: What You Need to Know

What is a Pre-Construction Agreement?

A pre-construction agreement (PCA) is an agreement between a builder and a purchaser of new residential real property to be erected on the land that includes the agreed upon terms and conditions of the sale and construction of the property. The builder will usually have an occupancy agreement that covers the occupancy of the property until it is complete. In some cases, the occupancy agreement may be a part of the PCA.
Restrictions on the construction details of the home such as square footage, home style, or design features, are typically set out in the PCA . The purchase price, deposit requirements, completion date and/or occupancy date may also be specified in the PCA. Essentially, it is a comprehensive agreement which may govern various aspects of the transaction between the builder and the purchaser. Typically, after entering into the PCA, a binding Tarion new home warranty agreement is executed and a permit is issued for the construction of the residential property.

Pre-Construction Agreement Components

No two pre-construction agreements will be exactly alike, but there are several common elements that will be present in most, if not all of them. Let’s take a look at three of the most important components of a pre-construction agreement.
Budget.
The budget or costs for a construction project can be difficult to pin down in pre-construction because there are still too many unanswered questions to provide any sort of final costs. However, a responsible contractor will work with the owner to develop estimates for each major category of the job, including architectural fees, site construction costs, contractor fees, fixtures, equipment, furnishings, landscaping, contractor mobilization, offsite storage, and other construction fees. The estimates should be broken down in categories and then by phase of the job. The estimated construction costs should then be totaled, and again broken into phases, providing a realistic budget for the entire job.
Schedule.
While it is impossible to provide a schedule before the design is finalized and approved, most contractors will provide a total estimated time frame for the job based on its experience with projects of similar scope.
Scope of Work.
It is important for both the homeowner and the contractor to agree on the scope of work for the job. The scope of work section of the agreement should specify such things as the existing site conditions, the location of utility companies, and existing easements that might interfere with the job.

Pros of Pre-Construction Agreements

For most of our clients, including residential and commercial developers, custom home builders, institutional and not-for-profit organizations, as well as construction contractors, we frequently recommend the drafting of a pre-construction agreement or a contract to be entered into prior to starting any project. The benefits of this practice are threefold: Payment schedules will set clear identification and allocation of costs, whether they be in absolute dollar amounts, percentages or otherwise; Mitigation of risk is necessary for developers on new builds that often have substantial investments involved. Many risks can be mitigated to some degree through a pre-construction agreement so that milestone dates can be addressed, change orders can be planned for, and timely payments can be made through a clear understanding of the work to be completed by all parties. With a clear understanding of the project, there is also a clear understanding of how to communicate between the parties who have an interest in the project. Providing regular updates will mean that the professional team on the project is not blindsided by change order adjustments to the project budget because of missed information in a communication. As well, matters of safety can be regularly reviewed with all stakeholders so that site safety is never compromised. At Freedman & Associates, we have acted for both owners and contractors during many stages of pre-construction, including providing assistance in the coordination of the contract documentation and co-ordination with the design consultants for projects. Using our service is advantageous for both owners and contractors so that negotiations are carried out between interested parties and the appropriate standards and expectations can be set for the project that mitigate risk for all parties involved.

Pre-Construction Agreements: Things to Consider

The legal considerations in creating a pre-construction agreement are numerous and crucial to the overall agreement. This section of the home building process is tightly regulated, and customer care improvements will vary based on the size of the home. As such, it’s important to have legal specialists review pre-construction agreements to identify necessary compliance with building codes, zoning, and financing and fee disclosures.
Keeping in mind that all building agreements are state-specific, it’s also important to ensure that your pre-construction agreement meets the requirements of the applicable laws in your state.
Typically, a pre-construction agreement is required when a builder collects a fee for a home that has not been constructed yet, or is in the planning stages at the municipal level. Customers will generally have to pay an earnest money deposit to hold a home. The buyer may still change their minds before construction starts, but builders employ pre-construction agreements to ensure their time and money has not been wasted on buyers who ultimately decide not to build a home.
In certain states, pre-construction agreements must provide specific disclosures and verbiage to explain that the buyer’s deposit is fully refundable upon cancellation of the sale. Other property laws may also be applicable, depending on where your development is located.

Avoidable Mistakes in Pre-Construction Agreements

When it comes to making construction deadlines, most people aren’t aware that it’s not just the construction workers who have a deadline to meet. All the people involved in the construction contract must also meet some time constraints. In Ontario, a homeowner must give the builder notice of default, and then the builder has 30 days to repair the problem once they receive notice . Common mistakes made when drafting the pre-construction agreement can delay the construction process, including:
1 Failing to specify the date of the eventual closing
2 Leaving blank spaces in the agreement
3 Failing to attach the signed plans and specifications
4 Not stating who is responsible to apply for permits
5 Failing to provide the homebuyers with complete copies of plans and specifications that received municipal approvals
6 Leaving out the price of the home and all extras
7 Not including the precise description of the land that is being purchased
8 Leaving out the limits of the buyer’s lot
9 Failing to describe parking assignments
10 Not listing the deposit schedule
11 Leaving out the section that sets out the price adjustment
Many of these missing details can lead to misunderstandings and potential litigation if there is a disagreement, including where costs or other terms of the agreement have changed and the vendor has failed to disclose these changes to the buyer. Many of these can be easily avoided by making sure that the listing realtors are aware of all the information. Setting a completion date means it’s essential that the real estate agents share the information about the property with each other.

Crafting Your Pre-Construction Agreement

Once adequate protection has been secured, the developer and builder may proceed to prepare the pre-construction agreement. Most pre-construction agreements are based on a simple letter of intent. Developers may wish to provide a draft to the builder for its comments; however, the developer should be cautious in sending the builder a draft of the pre-construction agreement, in order to avoid creating a conflict of interest should the builder wish to negotiate the terms of the pre-construction agreement.
There are several components to a pre-construction agreement that should be considered: An urgent issue for developers is liability and indemnity, where the developer promises to protect the builder (and its sub-trades) from all claims, demands, actions, losses, damages, costs, and expenses (including legal fees) arising out of the performance of the work, even if the work was negligently performed or even if it was not performed at all. In some jurisdictions, these matters may be unconscionable, and may render pre-construction agreements to be void. For example, the Ontario Court of Appeal, in Amcor Packaging Canada Inc. v. Columbia Containers, 2008 CarswellOnt 1228 (C.A.) has held that:
An agreement releasing a party from liability furthermore offended the common law principle that a party cannot release itself from liability arising from its own negligence. S.K. Godin, "Release and Indemnity Clauses" (1998-1999) 38 C.B.L.J. 209, at p. 218, notes that a complete release from liability is no longer enforceable in Ontario, apparently because the Consumer Protection Act, R.S.O. 1990, c. C.31, subs. 4(1), prohibits a supplier from excluding or limiting its liability for breach of duty of care … .
The enforceability of such limits of liability will depend on whether or not the pre-construction agreement is with a consumer, or is between two parties dealing at arm’s length.

Professional Services in Pre-Construction Agreements

Given that the pre-construction agreement will occur at the very start of the development process moving into construction, it is crucial that proper advice is obtained regarding the appropriate structure for the agreement, the key commercial and legal terms proposed, and the practical requirements of such an agreement.
Often, these agreements are structured at the request of parties, even if it is not envisaged that such a document is required. We often see documents drafted without a full appreciation of the requirements of the parties or the specific contractual obligations they must meet to satisfy external requirements.
We refer to Internal Approval Processes, which often require the developer to comply with strict reporting and corporate governance for their internal management approvals. In particular, these approvals will often include specific financial commitments. Pre-construction agreements should reflect such provisions. One of the most critical provisions that we often encounter is that upon review of those internal approval processes after the pre-construction contract is negotiated, that the contract does not meet the approval requirements. The contract is then returned to the parties to attempt to re-negotiate given that the approval has not been signed.
The benefit of advice being provided from other professionals is invaluable. We often find that contractual obligations are added to a contract because there is a perceived requirement, even though that requirement is not strictly correct. Given that the pre-construction contract is essentially an interim agreement , the contract should not impose duties on the parties which in most cases may not be able to be met given the interim nature.
We have also seen other situations where other professionals have required contractual provisions to be added when they are not required. Those situations also involve: Parties will often enter into pre-construction agreements without contemplating how they will manage the detailed negotiations of terms. Both the contractor and the developer will have a good understanding of the key commercial terms which they will propose in the long-term construct contract. However, such details may not be appropriately reflected in the pre-construction agreement, which will be set out by the lawyers often after the commercial terms have been agreed in principle.
Often, the difficulty of pre-construction agreements which provide a basic set of terms can be the need for further negotiation of key terms for the detailed design, construction, and other provisions for the main contact. This area is fraught with difficulty as often this negotiation can mean that the relationship between the parties is either solidified or broken down. It is crucial that the parties discuss where certain obligations will be placed, and how those obligations will be managed and transferred from the pre-construction stage into the detailed contract.
Involving appropriate professionals will assist in advising the developer and/or the contractor on how best to manage those initial negotiations. Often, the best advice will be that certain provisions should be carried over into the detailed contract. It is also important that the main contract and pre-construction agreement should be read together as a full set of terms to ensure there are no gaps and that there is certainty as to how the contract as a whole works.