Understanding Construction Contracts: What Every Homeowner Should Know

Types of Construction Contracts

There are four primary contract types in residential and commercial construction, each with different risk allocation between the homeowner and contractor.

Fixed-price (lump sum) contracts set a single total price for the defined scope of work. The contractor assumes the risk of cost overruns — if materials cost more than estimated, the contractor absorbs the difference. The homeowner knows the exact cost upfront. This works well for projects under $25,000 with a clearly defined scope where surprises are unlikely. The downside: contractors build a 10-20% margin into fixed-price bids to cover unknowns, so you are paying for risk insurance whether you need it or not.

Cost-plus with a fixed fee contracts charge the actual cost of materials and labor plus a predetermined management fee (typically 15-20% of project costs). The homeowner sees every invoice and pays only for actual costs. This provides maximum transparency and eliminates the contractor's need to pad estimates. It works best for renovations over $25,000 where hidden conditions may change the scope. The risk shifts to the homeowner — if costs run higher than estimated, you pay the actual amount. A well-defined scope of work with a realistic estimate mitigates this risk.

Cost-plus with a guaranteed maximum price (GMP) combines cost-plus transparency with a cost ceiling. The contractor charges actual costs plus their fee, but the total cannot exceed the GMP. If costs come in under the GMP, the savings are typically split between homeowner and contractor (commonly 50/50 or 75/25). This provides transparency with downside protection. It works well for mid-to-large projects ($50,000+) where the homeowner wants cost visibility but needs budget certainty.

Time and materials (T&M) contracts charge hourly labor rates plus material costs, with no fixed total. These are appropriate only for small, undefined projects — emergency repairs, investigation work, or projects where the scope cannot be determined in advance. Never use T&M for a full renovation or new construction project, as there is no cost control mechanism.

The Scope of Work: Your Most Important Protection

The scope of work (SOW) defines exactly what is included and excluded from the project. A vague SOW is the number one source of construction disputes. Every item should be specified with enough detail that a third party could evaluate whether the work was completed as agreed.

A properly written SOW includes: room-by-room description of work, specific product names and model numbers for fixtures and materials (not "standard faucet" but "Moen Arbor 7594EWSRS"), finish specifications (paint brand, color code, finish type), dimensions for custom work, and a clear list of exclusions (what is NOT included). Allowances — budget placeholders for items you will select later — should include a specific dollar amount and clear language about what happens if your selection exceeds the allowance.

Payment Terms and Draw Schedules

South Carolina law (SC Code Section 40-59-860) prohibits a contractor from collecting more than one-third (33.3%) of the total contract value before work begins. This protects homeowners from paying a large deposit to a contractor who then disappears or fails to perform. Payments after the initial deposit should be tied to completed milestones, not calendar dates.

A standard draw schedule for a $200,000 renovation might look like:

• Contract signing: 10% ($20,000)
• Demolition and rough framing complete: 20% ($40,000)
• Rough plumbing, electrical, and HVAC complete: 25% ($50,000)
• Drywall, flooring, and cabinetry complete: 25% ($50,000)
• Final walkthrough and punch list complete: 20% ($40,000)

Hold the final 10-20% until the punch list is fully resolved and you have received all permit documentation, warranty information, and lien waivers. Never release the final payment under pressure — it is your strongest leverage to ensure all work is completed to the agreed standard.

Change Orders: Protecting Yourself from Scope Creep

Change orders are formal amendments to the original contract that modify the scope, cost, or timeline. They arise from two sources: owner-requested changes (you want to upgrade the countertop or add a window) and condition-driven changes (the contractor discovers rotted framing or knob-and-tube wiring).

Every change order should include: a written description of the change, the cost impact (labor + materials, itemized), the timeline impact (how many days it adds), and your written signature approving the change before work begins. Never approve verbal change orders — if it is not documented, it will become a dispute. Track all change orders against your contingency budget. When contingency reaches 75% utilization, have a serious conversation with your contractor about remaining risk.

Owner-requested changes cost 20-40% more than the same work would have cost in the original scope. This is not the contractor gouging you — it reflects the real cost of stopping current work, potentially undoing completed work, reordering materials, and rescheduling trades. The lesson: make as many decisions as possible during the planning phase, not during construction.

Warranty Provisions

A standard construction warranty covers workmanship defects for 1 year after project completion. This means if something the contractor built fails due to poor workmanship (not normal wear) within 12 months, they repair it at no cost. This is separate from manufacturer warranties on products — windows (10-25 years), HVAC systems (5-10 years), roofing (20-50 years), appliances (1-5 years) — which the homeowner claims directly with the manufacturer.

The contract should specify: what the workmanship warranty covers, the duration, the process for submitting a warranty claim, the contractor's response time (reasonable: 48 hours for emergencies, 7-14 days for non-urgent), and what is excluded (homeowner modifications, normal wear, failure to maintain). In South Carolina, the implied warranty of habitability provides additional protection for new construction — the home must be fit for human habitation, and this protection extends beyond the express warranty period.

Lien Waivers: Why They Matter

A mechanic's lien is a legal claim that a contractor, subcontractor, or material supplier can file against your property if they have not been paid for work performed or materials provided. In South Carolina, subcontractors can file liens against your property even if you paid the general contractor in full — if the GC failed to pay the sub, the sub's lien right attaches to your property.

Lien waivers protect you. At each draw payment, require the general contractor to provide: a conditional lien waiver from the GC (releases their lien rights upon payment), and conditional lien waivers from every subcontractor and material supplier who worked on the project during that pay period. "Conditional" means the waiver is effective only when the payment clears. Once payment clears, you should receive unconditional waivers. This creates a paper trail proving all parties have been paid through each milestone.

Dispute Resolution

The contract should specify how disputes are resolved if the parties cannot agree. The three options are mediation, arbitration, and litigation.

Mediation uses a neutral third party to help both sides reach a voluntary agreement. It is the least expensive and least adversarial option. Most construction contracts should require mediation as the first step before escalation. Arbitration is a binding decision by a neutral arbitrator — it is faster and less expensive than court but the decision cannot be appealed. Be cautious of arbitration clauses that specify the contractor's preferred arbitrator. Litigation (court) is the most expensive and slowest option but provides full legal protections including the right to appeal. Most disputes should be resolved through mediation or arbitration before reaching court.

Red Flags in Construction Contracts

• Demanding full payment upfront: SC law caps initial payment at one-third. Any contractor asking for more is either uninformed or dishonest.
• No written scope of work: "We will renovate the kitchen" is not a scope of work. Without specifics, you have no recourse if the result does not match expectations.
• Vague material descriptions: "Standard fixtures" and "builder-grade materials" mean whatever the contractor decides. Insist on specific product names.
• No license or insurance documentation: If they cannot provide a license number and current certificate of insurance, walk away.
• No change order process: A contract without a defined change order process will result in disputed charges.
• Waiving lien waiver rights: Never sign a contract that waives your right to receive lien waivers at each payment.
• Unreasonably short warranty: Less than 1 year on workmanship is below industry standard.
• No termination clause: You should have a defined process to terminate the contract if the contractor fails to perform, with clear terms for payment of completed work and return of unused materials.