Contract Violations

Construction contract violations can turn the dream of a new home into a devastating financial challenge. Serious complications arise when builders collect deposits, draw down construction loan funds, and fail to deliver the promised work. In highly difficult cases, a builder might abandon the project entirely. Alternatively, the builder may pass away before finishing the work, leaving an incomplete, unlivable home.

A scenario involving a viewer named Chris from Birmingham, Michigan, captures exactly how complicated these situations become. The builder passed away during the construction of the home. Allegations arose that the builder had used the homeowner’s deposit and loan funds for personal purposes.

The home lacked a Certificate of Occupancy, and significant defects remained throughout the property. To make matters worse, the builder’s family representative directed Chris to contact an attorney. This left the homeowner without a clear immediate path forward.

This kind of situation does not fit neatly into a single category. It involves contract principles, corporate organization rules, and estate administration processes, all operating at the same time. This overview breaks down what homeowners need to know about construction contract violations. We will cover what they are, what exploratory steps to take first, and how to establish baseline protections before signing a building agreement.

What Are Construction Contract Violations?

A construction contract is a legally binding agreement between a homeowner and a builder. It sets out the scope of work, payment schedule, materials to use, and the project timeline. It also details the remedies available if either party fails to perform. Construction contract violations occur when one party fails to meet those agreed obligations.

From the homeowner’s side, disputes typically involve failing to make payments on schedule. From the builder’s side, however, the most serious issues include:

• Abandoning the project without a justified reason.

• Using client deposit or loan funds for personal expenses or for an entirely different project.

• Failing to obtain required permits, inspections, or a Certificate of Occupancy.

• Delivering defective or substandard workmanship that does not match the contract’s specifications.

• Refusing or failing to provide a proper accounting of how the client’s funds were spent.

Detailed and comprehensive construction agreements make it easier to evaluate whether a violation has occurred. Contracts that are vaguely worded, or that fail to address important issues upfront, create serious problems for homeowners. When investing substantial funds in a project, you should document every expectation clearly. Make sure you outline what work the builder must perform, when it is due, and exactly when each payment is appropriate.

Why Your Construction Agreement Details Matter

Signing a construction agreement without evaluating every provision can lead to costly oversights. This is especially true when large sums of money are at stake. Specifically, the payment schedule and the draw structure deserve close attention before finalizing the document.

A construction draw is a disbursement of funds from a construction loan, made to the builder at a specific milestone in the project. Before a builder can receive a draw, certain conditions typically must be satisfied. These conditions may include verified completion of a defined phase of work, review by the lender or a title company, and submission of waivers of liens from subcontractors who have already received payment.

Managing Subcontractors and Draws

When a builder subcontracts portions of the work, they must obtain lien waivers from those subcontractors before the bank releases the next draw. These waivers confirm that the builder has compensated all subcontractors, suppliers, and laborers. If that process breaks down, a homeowner may end up with unpaid subcontractor claims filed against the property, even after having paid the primary builder in full.

Before construction begins, a balanced agreement generally addresses the following points:

• At what milestones is the builder contractually entitled to receive each payment or draw?

• What verifications or inspections do the parties require before each draw release?

• Is a title company processing the transaction while collecting affidavits and lien waivers at each stage?

• What happens if the builder requests a draw before completing the required phase of work?

If any of these items are vague or missing from an agreement, that is a significant warning sign. For deeper context on how these documents are evaluated, you can schedule a comprehensive residential building contract review to ensure all essential milestone protections are firmly in place.

The Baseline Step: Requesting an Accounting

Before pursuing formal resolutions or making public assertions, there is an essential initial step. In a dispute involving construction funds, a full accounting of how the money was actually used is needed. Simply knowing that a builder took funds is not sufficient to evaluate a case. An accounting reveals clear details:

• How much the homeowner paid into the project, and at what stages.

• How much the builder was contractually entitled to receive at each milestone.

• What verified work the contractor actually completed in exchange for each payment.

• Whether any funds were diverted from their intended purpose.

This process can be complex, particularly when the builder operated through a business entity like a limited liability company or a corporation. If a title company was involved in disbursing funds, their records will also be a critical part of the picture. Furthermore, the results of the accounting directly help determine which strategic options make the most sense going forward.

Estate Rules and Unavailable Builders

When an individual contractor passes away, their outstanding financial affairs typically pass through a court-supervised estate administration process. If the builder had outstanding obligations to a homeowner, including unfinished construction work or funds that were not properly applied, the homeowner may be able to file a creditor claim against the estate.

Filing a creditor claim is how a claimant formally puts an estate on notice that a financial obligation exists. It is not a guarantee of recovery. However, it serves as a standard starting point designed to prevent an estate from distributing assets without addressing outstanding claims. These claims must typically be filed within a specific window after the estate is formally opened, meaning prompt evaluation is often necessary.

Corporate Entities and Personal Liability

Many builders and contractors operate through business entities. Most commonly, they use a limited liability company (LLC) or a corporation. The purpose of these entities is, in part, to shield individual owners from personal liability. In theory, if the entity faces a dispute, only the company’s assets are at risk, not the owner’s personal property. However, that protection is not absolute.

When a business owner does not properly maintain the formalities of their entity, serious legal consequences can occur. For example, they might mix personal and company funds, use project money for personal expenses, or otherwise fail to treat the entity as a legally distinct person. In these cases, courts sometimes apply a remedy known as piercing the corporate veil.

Piercing the corporate veil allows a corporate structure to be set aside so that the individual owner can be held accountable for the company’s obligations. In a construction dispute, if a builder improperly diverted project funds for personal benefit, this doctrine can serve as a key tool for a homeowner seeking recovery. Consequently, if the builder has also passed away, claims may intersect with both corporate wind-down proceedings and estate administration processes.

The Certificate of Occupancy Challenge

A Certificate of Occupancy is a document issued by a local building authority. It confirms that a structure has been completed in accordance with applicable building codes and is safe for occupancy. Without one, a home cannot legally be inhabited. When a builder passes away or leaves a project before finishing, homeowners are frequently left holding an unfinished property without this critical certificate.

The practical challenge then becomes finding another licensed contractor willing to take over an incomplete or defectively built home. This new contractor must inspect the existing work thoroughly and provide a warranty going forward. This process is often difficult and expensive. In general, contractors are reluctant to warranty someone else’s work, especially when that prior work was substandard or only partially completed.

As a result, the Certificate of Occupancy issue frequently compounds the other financial losses in these cases. Homeowners are not only trying to evaluate money already spent improperly. They are also facing additional costs to complete the home, correct defects, and ultimately obtain the necessary certificate to legally live in the property.

Multiple Synchronized Concerns

What makes these situations so difficult is that they involve multiple overlapping areas of operation running simultaneously. It is comparable to keeping several distinct plates spinning at once. Each area must be monitored, because a shift in one can change the overall outcome. In a scenario involving construction contract violations with an unavailable or deceased builder, the factors typically in play include:

• Contract principles: Was there a valid contract? Were its terms violated? What specific remedies does the agreement provide?

• Corporate structure: Did the builder properly conduct their business entity? Is there a basis for setting aside individual liability protections?

• Estate processes: Is there an estate being administered? What are the applicable deadlines for filing notices?

• Construction compliance: Was the work defective? Were required permits, inspections, and lien waivers properly obtained?

Managing these shifting pieces under a unified strategy helps ensure that no single issue falls behind, protecting the overall integrity of the property investment.

How to Prepare and Protect Your Investment

The most effective approach to managing construction contract violations is solid preparation before a single shovel hits the ground. Practical precautionary steps include:

• Review agreements thoroughly before signing: Construction contracts can be lengthy, complicated documents. Evaluating the agreement with a professional ensures that the document actively balances your interests and flags vague or one-sided provisions before they become active problems.

• Use a third-party intermediary for fund disbursements: Processing construction draws through a reputable title company or escrow service, with proper affidavits and lien waivers collected at each stage, adds a critical layer of accountability. This process makes it harder for funds to be shifted without detection and creates a documented paper trail.

• Verify credentials and insurance: Confirm that your builder holds an active professional license and carries appropriate insurance before signing anything. Licensed operators are subject to regulatory oversight and professional accountability standards. For additional guidance on picking an appropriate professional and understanding consumer alerts, see the State of Michigan building and remodeling advice for homeowners.

• Document everything in writing: Keep copies of all signed agreements, payment confirmations, written communications, draw requests, and any change orders. Relying on verbal changes to the scope or timeline can make terms extremely difficult to verify if a formal dispute arises.

• Avoid paying in full upfront: A reasonable deposit to cover initial materials and startup costs is standard practice. However, releasing large lump-sum payments to a builder before the corresponding work is verified and complete removes financial leverage. Structuring the payment schedule ensures that funds are released only as specific milestones are met and verified.

Frequently Asked Questions

What constitutes a construction contract violation? A construction contract violation occurs when a builder or contractor fails to meet their obligations under a signed agreement. Common issues include abandoning the project, misusing deposited or loan funds, delivering defective work, or failing to obtain required permits and certificates like the Certificate of Occupancy.

What steps can be taken if a builder does not finish the work? An informative first step is to request a full accounting of how funds were used. From there, exploratory options may include negotiating a resolution directly, pursuing alternative dispute resolution like mediation or arbitration if your contract provides for it, or initiating formal structural claims against the business entity or a deceased builder’s estate.

What is a creditor claim in an estate context? A creditor claim is a formal filing stating that an individual is owed money or has an outstanding financial claim against the estate of a deceased person. If a contractor passes away with outstanding obligations, filing a claim puts the estate on notice so the matter can be addressed before assets are distributed.

What does it mean to pierce the corporate veil? Piercing the corporate veil is a legal remedy allowing individual owners to be held responsible for the obligations of their LLC or corporation. In a construction dispute, if an owner improperly mixed project funds with personal accounts or failed to maintain corporate boundaries, a court may disregard the entity’s liability protection.

What is a Certificate of Occupancy and why is it required? A Certificate of Occupancy is issued by a local building authority confirming a structure is code-compliant and safe to occupy. Without it, a building cannot legally be inhabited. Resolving an unissued certificate typically requires hiring a new contractor to finish or correct previous work.

How do construction draw payments operate? A construction draw is a disbursement of loan or deposit funds made to a builder at a specified milestone. Each draw should be triggered by verified completion of a defined phase of work, often requiring lien waivers from subcontractors to confirm that all laborers and suppliers have been compensated.

What is a lien waiver in residential construction? A lien waiver is a signed document from a subcontractor, supplier, or laborer confirming they have been paid for their work and waiving their right to file a property claim. Collecting these waivers at each draw stage protects the property from future third-party financial claims.

Soble Law helps clients identify where real estate and business deals break down, define the legal risk, and take control of the next step.

Call: 888-789-1715

Website: www.provenresource.com⁠

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About David Soble: David is a seasoned real estate and finance attorney with more than 35 years of experience, combining his background as a “big bank insider” with a commitment to demystifying complex legal issues for his clients. As the founding attorney of Soble Law (Soble PLC), he leads a specialized team in Michigan and Ohio that handles real estate transactions, contract disputes, probate, and financial litigation. Known for a practical, no-nonsense approach and peer-rated excellence (Martindale-Hubbell AV Preeminent), Soble and his team strive to protect clients’ property and financial interests with clarity, integrity, and experience.

Disclaimer: The information in this article is for general educational purposes only and does not constitute formal legal, financial, tax, real estate, finance, probate, or any other professional service or advice. Reading this content or contacting us does not establish an attorney-client relationship. Every situation is unique, and laws change frequently, so you should always consult with your own qualified attorney or professional advisor before making any decisions.