“They Ain’t What You Think” on Fixed Fee Contracts
Cost-plus contracts directly relate to the construction costs incurred in each period. And commercial contracts closely track costs and payments. Thus, some people may believe fixed fee contracts function the same way.
But according to most fixed fee construction contracts, a draw request is a builder’s request for payment for certain line items of work. It is not a dollar-for-dollar match for what the builder’s has incurred in bills or costs to date. Nor is it based specifically on bills or invoices received by the builder. It is simply a mechanism for the builder to keep the cash flow moving during a construction project.
In other words, a draw request on a fixed fee agreement is not an estimate of the percentage of completion of an item or portion of work. A fixed fee is not a percentage completion type of contract.
More sophisticated owners might understand that is akin to a “Cash Call” when funds are running low. Some builders keep a float in their construction account to cover unanticipated expenses during a given period of time. Others keep the balance closer to zero. Theoretically, a builder could request a draw for 50% of the contract price at the beginning of the project. Either way, it is not an exact science and is not an accounting mechanism. It is important to explain the distinction to your potential buyer and to uneducated lenders.
Typical language defining draw requests that should be included on a fixed price builder contract:
“Owner agrees and acknowledges that draw schedule(s) utilized by the Builder with the lender/bank or owner has no relation to and is not representative of the actual costs to build the home, Builder budget(s), allowances and contract inclusions. Not all direct or indirect costs will be reflected on the draw schedule. The draw schedule is only a disbursement of the contract price over various line items for the sole purpose of making periodic construction draws. As a draw schedule may be used in all or in part as a form schedule for disbursements and there may be circumstances where a draw item is noted on the draw schedule, which is not specifically noted or specified in the contract.”
In fact, the draw requests are not even part of the contract. As such, they should be specifically disclaimed as follows: “Moreover, such draw sheets or schedules are not part of this contract or contract documents.”
Texas is a “right to contract” state
Ultimately, the final contract price is the total amount paid. However, it is drawn for over the life of the project at the builder’s discretion and based upon their experience. Thus, any argument that the amount, timing or manner of a draw request was or is a breach of contract is not correct. And would not be found to be so by an arbitrator or an educated judge.
Matthew L. Motes is a partner in the Fort Worth office of Shackelford, Bowen, McKinley & Norton, LLP. He can be reached at 817.887.8161 or [email protected]. The firm also has offices in Dallas, Austin, Houston and Nashville with a strong foundation in all areas of construction law and construction/design defect litigation.
