Thursday, July 22, 2010

Time and Materials Home Improvement Contracts

Many home improvement contractors prefer to work under time and material (cost-plus) contracts. And for good reason. Surprises are common when remodeling or repairing an existing dwelling. With a cost-plus contract, a contractor doesn't have to absorb the loss if there's a surprise once work gets started.

But there's a problem. Six states require that home improvement contracts show a total cost for the work in dollars and cents:
California -- Business and Professions Code § 7159(d)(5).
Illinois -- Compiled Statutes Title 815, § 513/15
Massachusetts -- General Laws 142A, § 2(a)(5)
Nevada (residential pools only) -- Administrative Code § 624.6958-2(f)
Pennsylvania -- Statutes Title 73, § 517.7(a)(8)
Tennessee -- Code Annotated § 62-6-508(a)(5)

Call the Attorney General's office in any of these states and you'll get the same answer: Contractors have to quote a total cost for home improvement work. Time and material contracts aren't legal and can't be enforced. According to the Attorney General's office, a contractor who isn't sure how much work is required should bid high enough to cover every contingency.

That makes little sense to contractors – and won't win many accolades among home owners.

I get quite a few calls about this and usually describe three ways around the problem. The first is to define the scope of work very precisely. Then list unit prices for extra work. For example, if it's a roofing job, exclude from the basic agreement any removal and replacement of roof deck or flashing. Then quote a separate unit price per square foot or linear foot if deck or flashing has to be removed and replaced. Contracts like that work fine under the law in all six of these states. But this isn't a true cost-plus (time and materials) contract. It's a fixed price contract with some extra flexibility.

The second choice is to work for wages. Let the owner buy materials. Simply invoice for your time. Of course, this is not construction contracting. And it leaves the owner with liability for payroll taxes and insurance, a burden most owners aren't willing to carry.

There’s a third choice that complies with both the letter and the spirit of the law in all six states. And it's a true time and materials contract.

A Better Choice
Base your contract on the cost of time and materials – but also show a guaranteed maximum price (GMP). The GMP qualifies as a total cost in dollars and cents for the purpose of state law. Provide in the contract that cost savings (any cost less than the GMP) will be split between the contractor and the property owner. You decide how cost savings will be split, such as 50-50 or 80-20. Collect for the cost of time and materials at each progress payment. When the job is done, subtract the total of all payments from the GMP. That's the cost savings – to be split between the contractor and the owner.

If you do work in one of these six states and want to bid home improvement jobs on a cost-plus basis, there's a site you need to check out. ConstructionContractWriter.com offers a program that drafts legal time and material contracts for home improvement work in any of the six states listed above. The trial download is free.