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Nine states place limits or impose restrictions on advance payments for some types of residential construction. If you have jobs in any of these nine states, you walk a fine line when asking for a down payment: Arizona, California, Indiana, Maine, Maryland, Massachusetts, Nevada (pools only) Pennsylvania and Tennessee.
I agree that states have an interest in limiting how much a contractor can collect in advance. But I feel there are legitimate reasons to ask for more cash up front on some jobs. For example, suppose you have to order (and pay for) custom windows for a job. And suppose those windows aren't returnable. I think it’s reasonable to ask for a hefty payment up front on that job. The same is true for nearly any job with special order materials, especially if those materials come with a long order-to-ship time.
Some of these nine states cut contractors a little slack when special order materials are required for a job. Massachusetts and Pennsylvania limit the down payment to one-third of the contract price but make an exception if materials have to be special ordered. In Maine, the initial payment on home improvement jobs can’t exceed one-third of the contract price. But the owner and contractor can waive the one-third limit by mutual agreement.
Tennessee limits the initial payment on home improvement contracts to one-third of the contract price but allows two exceptions: (1) if the contractor provides performance and payment bonds or other security guaranteeing performance, or (2) if the contract discloses the right of the owner to withhold payment until work is done and the owner volunteers to make a larger initial payment.
Maryland and California are a different story.
Maryland limits the initial payment on home improvement work to one-third of the contract price. California is even more restrictive. The initial payment can’t exceed $1,000 or 10% of the contract price, whichever is less. And there are no exceptions! I think that’s going to be unreasonable on some jobs. For example, a while ago I had a call from a contractor re-doing the interior of a luxury home in Malibu. Bare material cost for the marble flooring on this job was well over $10,000. And the flooring order required a 60-day lead time with full payment up front. I think that job required an advance payment when the flooring went on order.
If you agree and do home improvement work in either Maryland or California, I’m going to suggest two ways to handle advance payments. The law in Maryland and California limit only down payments. Fine. Don’t even mention a down payment in your contract. Instead, have the owner order and pay for the non-returnable materials. If that's not an option, make the scheduled start of construction the day you place non-returnable materials on order. Identify that in the contract as the first job phase. Then make payment due for job phase one when you order those materials. That can be the third day after the contract is signed. I believe either the first or second option complies with the intent of the law.
To try this yourself, have a look at Construction Contract Writer. The trial version is free.
What’s wrong with A.I.A. contracts? Nothing, unless you’re a construction contractor. I’ll explain.
The A.I.A. published their first “standard” construction contract in 1888. As a construction contractor, you’ve probably seen several A.I.A. contracts. Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal disclosure law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble.
Here’s why. Over the last 20+ years, nearly every state has enacted legislation that requires specific notices and disclosures in construction contracts – especially on residential and small commercial jobs. These notices are different in every state and vary with size of the job, type of work, materials used, who signs the agreement and even where the contract is signed.
Every contractor has seen these notices and disclosures: The 3-day right to cancel, lien law notices, checklists, limits on warranty claims, licensing requirements, contact numbers for the license board, bonding requirements, payment standards, arbitration disclosures, etc. The list goes on and on.
It varies by state, of course, but any contract that omits a required notice is likely to (1) be unenforceable by the contractor, (2) expose the contractor to a fine, (3) result in discipline by the license board or the attorney general, and (4) permit a court to award attorney fees if litigation is necessary. In some states, omitting a required notice is punishable by jail time.
Now, how does the A.I.A. deal with these state requirements? It doesn’t. A.I.A. construction contracts ignore state and federal disclosure law. That’s your problem, at least in the eyes of the A.I.A. contracts committee. I think that’s irresponsible. Can you name a reputable vendor in a heavily regulated industry that ignores state and federal law as a matter of policy? I can’t.
Why don’t A.I.A. construction contracts comply with state and federal disclosure law? I can think of three possible reasons.
(1) The A.I.A. came first. Back in 1888, there wasn’t any consumer protection law. Every construction contract was legal under state law. A hundred years later, when states started legislating contract terms, the A.I.A. simply went on selling their contracts as though nothing had happened. That was a bad choice, in my opinion.
(2) One size fits all. The A.I.A. sells boilerplate contracts. Adapting any construction contract to the type, size and location of the work and materials used is a complex problem. The A.I.A. contracts committee elected not to get involved, probably because of my next point.
(3) The A.I.A. (American Institute of Architects) serves the interest of architects, not contractors. Neither architects nor owners have any risk from a defective contract. Only contractors suffer if an agreement fails to comply with state law.
So what should the A.I.A. do? It’s not my place to counsel the A.I.A. But I know exactly what contractors need to understand: A.I.A. construction contracts omit the notices and disclosures required on most jobs in nearly all states. Using an A.I.A. form without the right notices can make a contract unenforceable – and could even land a contractor in prison.
In short, “accepted, reliable, fair and flexible” isn’t enough. You need contracts legal for the state where you do business and for the types of work you handle. If you agree, have a look at Construction Contract Writer. The trial version is free..
Has there ever been a construction project that didn’t require at least one change?
A contractor can go an entire career without seeing a job like that. And for good reason. Construction is too permanent and too expensive to resist making a change when the need is obvious. Take this as carved in granite: Changes are endemic to construction. That’s not going to change. Accept it. Welcome it! Changes should be a profit center for construction contractors. I’ll offer seven rules designed to make that happen.
Rule One: Every change requires an order.
This should be obvious. Don’t agree to any change without a written change order. Some states require it. Many construction contracts void oral agreements to make a change. Get it in writing.
Rule Two: Changes get done at your price.
On government and big commercial jobs, contracts often require that changes be done on a cost-plus basis –- usually cost plus a few percent. If you draft the contract, don’t let that happen. Make it clear in the agreement: Changes are your option, at your price and on your time schedule.
Rule Three: Surprises aren’t your problem.
When you discover something unexpected -- a defect in the plans, something about the site, an emergency, a mistake by the owner, etc. -- it’s not your responsibility. Contractors aren’t insurance companies. A surprise that requires extra work is a contract change and requires a change order. A good contract will identify types of surprises that constitute extra work. When a surprise happens, just point to the contract clause that covers the situation. Case closed. You win.
Rule Four: Changes required by law are extra work.
Contractors have to follow the building code. But any change in the job required to conform the work to existing or future laws, ordinances or regulations is extra work. Your contract should make that clear.
Rule Five: A dispute over extra work does not delay payment for other work.
Payments are due as scheduled for work not in dispute. That removes the incentive to haggle over extra work and simply makes sense.
Rule Six: Collect in full for extra work when that work is done.
Don’t wait until project close-out to collect for extra work. When extra work is 100% done, you’re entitled to 100% payment for that work. Put that in the contract.
Rule Seven: Attach a sample change order form to your contracts.
California already requires this in home improvement contracts. California Business and Professions Code § 7159(c)(5). Having a change order form handy simplifies and organizes making changes. It also puts the owner on notice: You’re going to charge extra for extra work. That helps head off problems.
If you’re using Construction Contract Writer, you’ll find all seven of these options offered in every contract-drafting interview. If you’re not using CCW, have a look at the free trial download.
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.
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.
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.
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.
