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.

14 comments:

  1. This comment has been removed by the author.

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  2. Hello,

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  3. Is it typical under a time and materials contract for the homeowner to be provided detailed invoices (IE how many hours worked, materials and their cost plus markup), or just general invoice ($X for materials and $Y for time)?

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  4. I'm not aware of any "typical" convention for documenting charges under a time and material contract. But disputes will be nearly inevitable under any cost+ agreement if payment terms are not well-defined:
    1. What gets reimbursed? (labor, materials, equipment, supervision, overhead)
    2. What documents are required for reimbursement? (a written summary or actual receipts)
    3. Does the owner have the right to audit the contractor's records? (when and where).
    4. Is reimbursement due for waste, neglect or negligence?

    A time and material contract should also:
    (1) Provide reimbursement only for what's "reasonably necessary" and,
    (2) Define "ressonably necessary" very precisely.

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  5. Great Article, So is this also true if I have a insurance property loss at my house and I need emergency board up to avoid future damage from occurring that I cannot enter into a T & M agreement? If not, then can I enter into a T & M agreement as long as I am given a Not To Exceed value and this is for just for the emergency service only?

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    1. Only six states prohibit time and material home improvement contracts. So the answer to your question depends on the state where work will be done. If you're not in one of those six states, time and material home improvement contracts are fine. But there's a larger issue here. Seventeen states regulate storm damage repair work if any part of the job will be covered by insurance. See my blog post of 11/30/12 for a partial list. Since then, UT, SC, WI and MS have enacted similar laws. An owner gets to cancel the contract (and get a refund) if any part of the insurance claim is denied. But it gets still more complex. All states that require special disclosures in agreements for property loss work also permit emergency repairs (for which there is no right to a refund) if the agreement for emergency repairs includes disclosures that comply with the law. Emergency storm damage repairs can be done on a time and material basis in most of those seventeen states. This is a good question and an important topic for home improvement contractors who do insurance work. I'll put this topic on my list of good issues for future blog posts.

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    2. I see Pennsylvania passed the law to allow T &M contracts so in reality it is five states but one of these is related to residential pools only. Is this correct?

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  6. True. Nevada prohibits time and material contracts only for pool construction. And Pennsylvania is a mixed bag. My November 2014 blog explains. It's now legal to write a time and material contract in Pennsylvania IF that contract also includes an estimated cost and IF the actual time and material cost doesn't exceed the estimate by more than 10%. BUT if your PA home improvement contract doesn't comply with HICPA, the court will still award the contractor the value of time and materials.Does that make sense to you? (It's plain nonsense to me.)

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  7. Scenario and how would you respond. In California T & M contract cannot be used in home improvement but I decide to use a legal contract provide all the correct documents and disclosures and include a GMP estimate fully detailed scope of service and bill in a T & M format now we are legal or not? Does the law extend to T & M Pricing or Billing Format even if I use a legal contract?

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  8. If a California home improvement contract is otherwise legal and includes a guaranteed maximum price, your invoices can be based on time and materials. But to avoid surprises, the contract should define costs to be reimbursed: "All necessary labor, materials, equipment, subcontract work, supervision, overhead expense" and your fee (in percent or $ per hour, week, etc.). Then define “necessary.” Time and materials contracts don't eliminate disputes. The contractor and owner remain potential adversaries. Only the context of the dispute has changed.

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    1. Do you have a published email or contact form? I have a couple of question regarding your contracts and other services related to contractors

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  9. You can reach me at gary@moselle.net.

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    1. Washington state has no special requirements for remodeling projects. But any job that goes way over budget can make it hard to collect. My advice for any T&M job: Be sure you have a good and complete contract. Construction Contract Writer is the best tool I know for drafting air-tight T&M contracts. It works fine in WA. Then keep good records -- receipts, bills, payroll records, etc. Any cost you can document fully is a potential dispute. No matter what your contract says, collect in full at the end of each week or at least bi-monthly. No surprises. On that basis, you'll do fine, even if costs go way over budget.

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