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. Construction Contract Writer 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.

Home Improvement Contracting in Indiana

All states tip the playing field in favor of property owners who contract for residential work. Nearly every state requires very specific notices and disclosures in residential construction contracts. Even the slightest defect in an agreement can have consequences – fines, revocation of a license, charges for attorney fees, no right to collect or even jail time. All of these penalties fall on the contractor. The property owner gets a free ride.

Penalties for a using a defective contract are different in every state. Some states, such as Hawaii, simply make the contract unenforceable. The contractor collects nothing. See my blog for December 17, 2009. Other states give the contractor the right to collect some part of what's owed, though not the full contract price. The case of Al-Jundub v. Ardizzone Enterprises (March 2010) puts Indiana in that category. I'll explain.

A storm in March 2007 did some damage to the exterior of a home in Plainfield, Indiana. The owner, Amjad Al-Jundub needed a contractor to make repairs. John Rumpel at Ardizzone Enterprises sent Al-Jundub a signed proposal for doing the repairs – at a cost of $11,761.80. Al-Jundub signed the proposal and faxed it back to Ardizzone. As simple as that, Ardizzone Enterprises was hip deep in trouble. Here's why.

Indiana's Home Improvement Contracts Act requires ten very specific disclosures in home improvement and home repair contracts, even for small jobs like siding, painting, fencing and landscaping. A home improvement contract that omits any of the ten disclosures isn't enforceable under Indiana law.

In this case, Ardizzone Enterprises made a major mistake. Two of the ten disclosures were missing: the starting date and the completion date. And there was no written agreement on changes to the work. That made the contract unenforceable.

Ardizzone Enterprises finished the job. Al-Jundub wasn't happy with the work and refused to pay – not even a dime. Ardizzone Enterprises sued and the court agreed with the home owner. Ardizzone Enterprises has no right to collect under a contract that doesn't comply with Indiana law.

But the Indiana court wasn't done. There's a legal principle called quantum meruit. That's Latin for "as much as he deserved." In this case, the Indiana court decided Ardizzone Enterprises deserved $10,761.80, a thousand dollars less than the contract price. John Rumpel's mistake in drafting the contract earned Al-Jundub a $1,000 discount.

Moral to the story: Don't leave it up to a court to decide how much you deserve. Use iron-clad forms enforceable in your state. If you make a living in Indiana as a construction contractor, I recommend the Inadiana version of Construction Contract Writer.

Contracting in D.C. -- The Home Solicitation Sales Notice

Not many residential contractors think of themselves as door-to-door salespeople. But the law in most states puts nearly all residential contractors in the home solicitation sales business.

"So what," you say. "I'm not doing anything shady. I deliver real value and have nothing but satisfied customers."

Maybe so. But there's reason to be concerned and some steps you need to take. I'll explain both points using District of Columbia Code § 28-3811 as an example. (Requirements in 27 states are similar, though not identical.)

First, what's covered by the D.C. law?
Any cash or credit sale negotiated at or near the residence of an owner is defined as a home solicitation sale. That includes just about every home improvement contract ever written. You need to be on site to bid the job. There's an exception for deals closed at a permanent place of business where goods or services are sold. That excludes jobs written by big box retailers. But otherwise, if you discuss any construction work at the home of the property owner, it's a home solicitation sale and has to comply with § 28-3811.

Second, what does the law require?
That's easy. The answer in nearly all states is the same. The owner has three business days to cancel the deal. And in each of the 27 states plus the District, your contract has to include a notice of the right to cancel written in very specific words. In the District, those words are in § 28-3811(g)(2).

Is there any way around this 3-day right to cancel?
Yes, but it's not going to work every time. First, if there's a true emergency and if the owner signs a waiver, there is no right to cancel. Second, it's not a home solicitation sale if the owner initiates the contact and invites the contractor to make a sales call.

What's the penalty for omitting the notice?
Most states impose a fine up to $1,000. But that's just the beginning. Until the notice is delivered, the owner has the right to cancel the deal and get a full refund – even years after work is done!

I attach the Federal (Reg Z) 3-day right to cancel to my contracts. Isn't that enough?
In each of these 27 states and the District of Columbia, the local right to cancel is in addition to the Federal right to cancel. You need to provide both the state cancellation notice and the Federal cancellation notice as separate documents in these states:

Alabama, Alaska, Arizona (credit sales only), Arkansas, Connecticut, District of Columbia, Florida, Georgia, Hawaii, Indiana, Kentucky, Michigan, Mississippi, Missouri, Montana, New Hampshire, New Jersey, New York, North Dakota, Oklahoma, Oregon, Rhode Island, Texas, Vermont, Washington (roofing and siding only), West Virginia, Wisconsin, and Wyoming.

And what about the other 23 states?
Each has a home solicitation sales act. But in each of these 23 states, attaching at least two copies of the Federal Regulation Z notice to your contract meets the state requirement.

A word to the wise.
Don't give clients forever to request a full refund. If you do business in one of the 27 states or the District, include the required cancellation notice in your contract. If you make a living as a residential contractor in any of the 27 states, complying with state law is easy. Get Construction Contract Writer. The trial version is free.

Construction Contracting in Maine

The legislature in Augusta has earned a reputation for piling on law that affects construction contractors. This month's Maine Supreme Court decision in Cellar Dwellers, Inc. v. Dominic D'Alessio, Jr. illustrates the point.

Dominic D'Alessio needed plumbing and HVAC work for the new home he was building in Brunswick, ME. The job went to Jim Peacock (Cellar Dwellers, Inc.) in two contracts totaling $56,990, plus a third oral contract for $2,478 on a vacuum system. That should have been good work – especially when D'Alessio agreed to pay an additional $17,464 for changes. But there was a problem. D'Alessio ran short of cash before work was done -- promising a check "in a week or two" and later paying with a non-negotiable check. After several demands, Peacock walked off the job, leaving $3,000 in work unfinished and an invoice for $2,995 unpaid. Eventually, Peacock filed suit under Maine's Prompt Pay Act. That raised the stakes considerably.

The Prompt Pay Act, Title 10, § 1118(2), charges an owner 1% per month on any amount wrongfully withheld. But that's just the beginning. Section 1118(4) requires that a court or arbitrator award attorney fees and expenses if payment was wrongfully withheld. Peacock's attorney fees would eventually exceed $10,000.

D'Alessio counterclaimed for breach of contract, negligence and violation of Maine's Home Construction Contracts Act. That doubled the bet once more. Title 10 § 1487 of the Home Construction Contracts Act requires 14 very specific notices and disclosures in residential construction contracts. Omission of any one is an unfair trade practice under Maine law, making the contractor liable for damages plus attorney fees and costs.

So either D'Alessio or Peacock was going to be liable for over $20,000 in attorney fees on a $56,990 job.

At the trial court, Peacock won an award of $6,468 for damages plus $10,000 in attorney fees. D'Alessio wasn't satisfied. He appealed to the Supreme Judicial Court of Maine. The April 6, 2010 decision wasn't good news for Peacock. The justices reversed the award of attorney fees, penalties and interest on the grounds that Peacock hadn't finished work on the first two (plumbing and heating) contracts. The final payment of $2,995 on those two contracts wasn't due yet and had not been "wrongful-withheld". Peacock was justified in walking off the job and was entitled to damages for breach of contract. He was not due an award under the Prompt Pay Act for those contracts. But failure to pay on the third contract (the vacuum system) was a violation of the Prompt Pay Act. So D'Alessio would have to cover some portion of Peacock's attorney fees on that issue. The Supreme Court sent the case back to the trial court to tie up the loose ends.

Maine, like many states, is trying to protect consumers (property owners). That's the Home Construction Contracts Act. Maine is also trying to redress grievances contractors have about slow payment. That's the Prompt Pay Act. But in Cellar Dwellers, Inc. v. D'Alessio, Maine law was the problem, not the solution. Here's why.

Both Peacock and D'Alessio planned to recover their attorney fees under Maine law. So they could afford to litigate this $2,995 dispute for years – nearly four so far. Conceivably, both Peacock and D'Alessio could have been awarded attorney fees, each paying the fees of their opponent! Obviously, that's not what the Maine legislature had in mind. Cases that should be settled in Maine's small claims court can now escalate very easily to Maine's Supreme Court. With the very best of intentions, Maine has created a trap for both contractors and property owners.

So What's a Maine Contractor to Do?
Here's what not to do. Maine's Attorney General offers a model home construction contract. But read the disclaimer before adopting this agreement: The Maine Attorney General does not guarantee that this model contract satisfies all legal requirements. That's good, because the AG's model contract doesn't comply with either Maine law or Federal law. Here's a better source if you need contracts for either commercial or residential work in Maine.

Construction Subcontract Flow-Down

Every construction contractor and subcontractor has heard the term flow-down. A few probably feel they were washed away by flow-down. I don’t think that’s necessary and will suggest a better way.

Flow-down is what general contractors do in subcontracts. They incorporate into a subcontract all the terms of the prime contract – usually by stapling the prime contract to the subcontract. That saves a lot of typing. It also offers a (false) sense of security to general contractors. In theory, flow-down obligates the sub to do everything for the sub’s portion of the work that the general contractor has to do under the prime contract.

So if the owner has a legitimate complaint about a sub’s work, and if the prime contractor is obligated to make repairs, the sub has the same obligation. That’s perfect symmetry and should protect general contractors. Flow-down is great for general contractors. Right?

Well, not quite.

Courts don’t like flow-down for several reasons. First, it’s an adhesion contract between parties with different levels of bargaining power. Second, flow-down binds subcontractors to terms they may not have read, probably don’t understand and make no sense whatsoever in the context of a particular subcontract. Worse, the stapled prime contract may have terms completely inconsistent with the signed subcontract.

The result: Courts simply don’t enforce flow-down as general contractors expect. Instead, flow-down binds a “subcontractor only as to prime contract provisions relating to the scope, quality, character and manner of the work to be performed by the subcontractor." (2007 NY Slip Op 2981)

What does that include? Your guess is as good as mine. But I think some would insist it doesn’t go much beyond what appears on the plans and in the specs. That trashes most of the prime contract: payment, liens, delay, insurance, extra work, termination, call-backs, claims, warranty, statute of limitations, indemnification, and a host of other common trouble spots.

If you’re a general contractor, staple-based flow-down can be poison.

But don’t misunderstand. Courts aren’t saying that subcontractors can’t be bound by terms in the prime contract. They can. But those terms better be in the subcontract and over the signature of the subcontractor.

Fortunately, that’s relatively easy today. Just get a digital copy of the prime contract. Replace every occurrence of “owner” with “contractor” and every occurrence of “contractor” with “subcontractor.” That’s a real flow-down subcontract and should be enforced by every court in the land.

But read the subcontract carefully before getting a signature. Add anything that applies to subcontracts only (i.e. payment terms, release of retainage) and eliminate anything that doesn’t apply (i.e. notices and disclosures). Then make the changes required by state law. Many states have special rules for subcontracts.

If you write both prime contracts and subcontracts, Craftsman’s Construction Contract Writer makes flow-down easy. When the prime contract is done and signed, just click to turn that prime contract into a perfectly valid flow-down subcontract covering all the same issues – automatically deleting what doesn’t apply, adding what’s unique to subcontracts and accounting for any special state requirements.

3-Day Right to Cancel – Contractors Beware

Every contractor who does residential work knows about a home owner's three-day right to cancel. But what you may not know is how vicious this innocuous little form can be. Here's a short quiz to test your understanding. Answers are below.

True or false?

1. The 3-day right to cancel is a federal notice and isn't required in most states.

2. There no harm in skipping this form. It's safe to leave it out of your contracts.

3. If you decide to include the notice in your contract, one copy is enough.

4. The 3-day right to cancel is required only on major home improvement jobs.

5. The 3-day right to cancel is required only if you extend credit to the owner.

First, something that should be obvious: Don't start work, don't deliver materials, don't schedule crews until three business days after the contract is signed. When a contract is cancelled under federal law (12 C.F.R. 226.15), you have to undo the deal at your own expense. Any lien you thought you had is cancelled. You're liable for twice any finance charge up to $1,000 plus costs and attorney fees.

Answer to Question 1 – Not required in most states.

False. The 3-day right to cancel is a federal right. But it's a right granted in all states any time you do work on the principal residence of the owner. Even if your state has its own 3-day right to cancel, you still have to deliver the federal form, filled out with the date of signing, your mailing address and the last day to cancel.

Answer to Question 2 – It's safe to skip this form.

False. It's not safe at all. Omitting the 3-day notice gives the owner three years to cancel (§ 226.15-b).After cancellation, you have the right to take materials back. But you have to make a full refund! Imagine making a full refund on a home improvement job three years after completion. More on that later.

Answer to Question 3 – One copy of the form is enough.

False. 12 CFR 226.15-b requires that each owner receive two copies of the cancellation notice. If two adults are living in a home, it's safe to assume that both are owners. Delivering less than four copies of the 3-day right to cancel is like delivering none at all. See Weeden v. Auto Workers Credit Union, Inc., 1999 U.S. App. LEXIS 5272.

Answer to Question 4 – Required only on major jobs.

False. The federal 3-day notice is required on every job that qualifies as the principal residence of the owner, whether a custom home, home improvement or home repair. There is no threshold dollar amount. Even replacing a water heater gives the owner 3 days to cancel. In a true emergency, the owner can waive the right to cancel with a written statement.

Answer to Question 5 – Required only if you extend credit.

False. The 3-day right to cancel exists on every job that could result in a lien on the owner's property. And that's every job because all states give contractors a construction lien for their work.

Don't let this happen to you.

A few years ago Alma and Robert Johnson needed a little work done on their front porch at 65 Stanford Street, Providence, Rhode Island. Interstate Contractors got the job. They finished the work and got paid -- $12,400. Unfortunately for Interstate, their work was better than their contract. I'll explain.

Two years later, the Johnson's had some financial reverses. Their home fell into foreclosure and the Johnsons filed for bankruptcy. One of their creditors had a smart attorney with the good sense to pull out the contract for that front porch job. Turns out, Interstate's contract wasn't quite right. There wasn't any federal 3-day cancellation notice. That was Interstate's Mistake One. The Johnson's could still cancel the job, two years after completion, and get a full refund under federal law. Great! But it gets better.

Rhode Island gives owners a 3-day right to cancel – but only if the owners don't get the federal right to cancel notice. Well, the Johnsons never got their federal notice. So Rhode Island's law applied. Interstate must have known that. Interstate's contract with the Johnsons included the Rhode Island 3-day cancellation notice. Unfortunately, the Rhode Island notice wasn't quite perfect. It wasn't in 10-point bold type. And one part of one paragraph was missing. Bingo! Interstate's Mistake Two.

So the Johnsons canceled under Rhode Island law. Interstate now had 20 days to refund the full $12,400. Too bad. They didn't make it. And that was Mistake Three. Failure to make a full refund in 20 days made Interstate liable to the Johnson's creditors for double the contract amount -- $24,800. And that was the award of the court. (I'm not making this up. See 239 B.R. 255.)

Like I said, that federal 3-day notice can be full of nasty surprises.

My recommendation: Don't be an Interstate. Use quality contracts that comply with both your state law and federal law. You'll find plenty here.

Changes in Minnesota Construction Contracts

Every contractor who builds, repairs or remodels homes or apartments in Minnesota knows about One, Two, Ten.

One: Contractors have to provide at least a one year warranty on materials and workmanship.

Two: Plumbing, electrical and HVAC work require a two-year warranty.

Ten: Any "major construction defect" is covered for ten years.

All this is courtesy of the Housing Statutory Warranties Act, Minnesota Statutes § 327A.01 to 08. Nearly all residential construction, repair and improvement work is covered, whether a home, an apartment or a condominium. Install roofing, siding or flooring, a window or a door and you've written a one year warranty. Install a water heater, a furnace or a lighting fixture and your warranty runs for two years. On new construction, room additions and conversions, your warranty runs for ten years.

Both the first owner and later owners are covered by the warranty. After being notified of a claim, a contractor has 30 days to do an inspection and make an offer to repair. A contractor who refuses to make good on the warranty will be liable for the cost of repairs and can be found in contempt of court.

Changes

Minnesota's One, Two, Ten law changed in August 2009. Governor Pawlenty signed a bill that affects every home construction and home improvement contract in the state. Minnesota's statutory warranty now has to be written into your contract – three paragraphs of very precise language – one warranty for new construction and a different warranty for repair or home improvement work. A copy of the warranty has to be left with the property owner.

Omit the warranty from a contract and you've got trouble: On new construction, leaving the warranty out is considered a false statement and makes the contractor liable for a fine up to $10,000. Leaving the warranty out of a repair or home improvement contract can draw an invitation to discuss your license with the CCLD (Construction Codes and Licensing Division).

Minnesota's statutory warranty law has a few exceptions. For example, yard improvements such as walkways, walls and fences don't require a written warranty. The warranty can't be waived. But there are options if you offer protection underwritten by a Minnesota home warranty company.

A breach of warranty is anything that doesn't comply with Minnesota's building code (the IRC). That's a curious definition. The building code says almost nothing about cosmetic defects or how long materials have to last or water leakage. Those and other performance issues are the most common construction defects. The IRC is concerned primarily with selection of materials and safety, not durability and habitability. Warranty law in most states is based on consumer expectations. Not so in the Gopher State.

If you're serious about drafting construction contracts that comply with Minnesota law, I can recommend another site.