Given the variety of problems that can arise on a construction project, from defects to delays, it’s difficult to draft a construction contract that addresses every possible problem exactly right. However, so long as you adequately address the “big three” of scope, price and time, it’s also difficult to draft a construction contract wrong.
That is, with one exception.
And that one exception, in California, is home improvement contracts. In 2004, the California State Legislature enacted the state’s Home Improvement Business statute (Bus. & Prof. Code §§7150 et seq.). Section 7159 of the statute sets forth what must be included in home improvement contracts.
It’s a section that could have been written by Felix Unger of the Odd Couple. In addition to setting forth required language that must be included in a home improvement contract, it directs where that language is to be set forth in a home improvement contract, and even how it is to be presented, down to type sizes.
So here’s what you need to know about home improvement contracts.
What types of projects do home improvement contracts apply to?
A home improvement contract must be used when repairing, remodeling, altering, converting, modernizing, or adding to “residential property.” It includes residential remodeling projects involving the construction, erection, replacement or improvement, not only of the interiors of residential property, but also exterior improvements including driveways, swimming pools (including spas and hot tubs), terraces, patios, awnings, and porches, underground structures including fallout shelters and basements. It also includes, some might be surprised, even fences.
What types of projects do home improvement contracts not apply to?
A home improvement contract does not need to be used for:
New (i.e., ground up) residential construction;
Work with an aggregate contract price, including labor, services and materials, of $500 or less;
“Service and repair contracts” in which: (1) the contract is for $750 or less; (2) the buyer initiated the transaction; (3) the contractor does not sell the buyer goods or services beyond those necessary to take care of the particular problem that caused the buyer to contact the contractor; and (4) no payment is due until the work is completed (Note: There are specific requirements for service and repair contracts as well, however. See Bus. & Prof. Code §7159.10).
The sale, installation, and service of a fire alarm system if the sale and installation costs do not exceed $500 (Note: There are specific requirements for fire alarm system contracts as well, however. See Bus. & Prof. Code §7159.9).
Costs associated with monitoring a burglar or fire alarm system.
Do home improvement contracts apply to work performed for tenants?
Yes. The statute defines a “home improvement contract” as an “agreement . . . between a contractor and an owner or between a contractor and a tenant, regardless of the number of residence or dwelling units contained in the building in which the tenant resides, if the work is to be performed in, to, or upon the residence or dwelling unit of the tenant.”
Do home improvement contracts apply to work on apartment buildings and mobile homes?
The statute doesn’t specifically address apartment buildings or mobile homes. However, given the breadth of the statute, it appears that it would apply to mobile homes generally and, at the very least, to work performed in, to, or upon the residential units of an apartment building excluding common areas.
What must be contained in a home improvement contract?
Here’s the Felix Unger list. Brace yourself:
Fomatting: A home improvement contract: (1) must be in writing; (2) must be legible if handwritten (although you would be crazy to handwrite a home improvement contract); (3) must identify the type of contract by including the words “Home Improvement” in at least 10-point boldface type; (3) text must be in a typeface no smaller than 10-point type, except as otherwise provided; and (4) headings must be in a typeface no smaller than 10-point boldface type, except as otherwise provided.
Timing: Before any work commences, a home improvement contract, signed and dated by the contractor and the buyer, must be provided by the contractor to the buyer. A home improvement contract must also include the following statement in at least 12-point boldface type: “You are entitled to a completely filled in copy of this agreement, signed by both you and the contractor, before any work may be started.”
Dates and Addresses: A home improvement contract must include on the first page: (1) the date the buyer signed the contract; and (2) the name and business address of the contractor to which the applicable “Notice of Cancellation” may be mailed, immediately preceded by a statement advising the buyer that the “Notice of Cancellation” may be mailed to the contractor at the address indicated.
Licenses and Registrations: A home improvement contract must include: (1) the name, business address and license number of the contractor; and (2) the name and registration number of the home improvement salesperson that solicited or negotiated the home improvement contract, if applicable.
Scope of Work: A home improvement contract must include the heading “Description of the Project and Description of the Significant Materials to be Used and Equipment to be Installed” followed by a description of the project and description of the significant materials to be used and equipment to be installed. For swimming pool projects, the description of the project must include a plan and scale drawing showing the shape, size, dimensions, and the construction and equipment specifications.
Contract Time: A home improvement contract must include the heading “Approximate Start Date” followed by the approximate date on which work is to commence and the heading “Approximate Completion Date” followed by the approximate date in which work is to be completed.
Contract Price: A home improvement contract must include the heading “Contract Price” followed by the contract price in dollars and cents.
Downpayment: If a downpayment will be charged, a home improvement contract must include the heading “Downpayment” followed by the amount of the downpayment and the following statement in at least 12-point boldface type: “THE DOWNPAYMENT MAY NOT EXCEED $1,000 OR 10 PERCENT OF THE CONTRACT PRICE, WHICHEVER IS LESS.”
Progress Payments: If progress payments are to be made, a home improvement contract must include the heading “Schedule of Progress Payments” followed by the amount of each progress payment in dollars and cents and, for each progress payment, the specific work or services to be performed and materials and equipment to be supplied. In addition, a home improvement contract must include the following statement in at least 12-point boldface type: “The schedule of progress payments must specifically describe each phase of work, including the type and amount of work or services scheduled to be supplied in each phase, along with the amount of each proposed progress payment. IT IS AGAINST THE LAW FOR A CONTRACTOR TO COLLECT PAYMENT FOR WORK NOT YET COMPLETED, OR FOR MATERIALS NOT YET DELIVERED. HOWEVER, A CONTRACTOR MAY REQUIRE A DOWNPAYMENT.”
Extra Work and Change Orders: A home improvement contract must be incorporate a change order form. In addition, a home improvement contract must include the heading “Extra Work and Change Orders” followed by the statement: “Extra Work and Change Orders become part of the contract once the order is prepared in writing and signed by the parties prior to the commencement of work covered by the new change order. The order must describe the scope of the extra work or change, the cost to be added or subtracted from the contract, and the effect the order will have on the schedule of progress payments.” In addition, a home improvement contract must include a statement notifying the buyer that the buyer may not require a contractor to perform extra work or change order work without a change order, that the failure to issue a change order does not preclude recovery of compensation for work performed based on legal or equitable remedies to prevent unjust enrichment, and that change orders must be in writing and address: (1) the work covered by the change order; (2) the amount added or subtracted from the home improvement contract; and (3) the effect the change order will have to progress payments and the completion date.
Contract Documents: If other documents are to become a part of a home improvement contract, a home improvement contract must include the heading “List of Documents to be Incorporated into the Contract” followed by a list of documents to be incorporated into the home improvement contract.
Waiver and Releases: A home improvement contract must include a statement that, upon satisfactory payment being made for any portion of work performed, the contractor shall furnish the buyer with a “a full and unconditional release from any potential lien claimant claim or mechanics lien.”
Insurance: A home improvement contract must include, either within the home improvement contract or as an attachment to the home improvement contract, a notice indicating whether the contractor carries commercial general liability insurance and workers’ compensation insurance using specific language. See Bus. & Prof. Code §7159(e) for specific language.
Payment and Performance Bonds: A home improvement contract must include a notice, in close proximity to the signatures of the contractor and buyer, informing the buyer that the buyer has the right to require the contractor to have a payment and/or performance bond.
Mechanics Lien Warning: A home improvement contract must include a notice with the heading “Mechanics Lien Warning” using specific language. See Bus. & Prof. Code §7159(e)(4) for specific language.
CSLB Contact Information: A home improvement contract must include a notice in at least 12-point type providing contact information for the California Contractors State License Board using specific language. See Bus. & Prof. Code §7159(e)(5) for specific language.
Buyer’s Right to Cancel: A home improvement contract must provide buyers with a three-day or seven-day right to cancel. A seven-day right to cancel must be provided where work is to be performed on residential property damaged by a sudden or catastrophic event in which state of emergency has been declared by the President of the United States, the Governor of the State fo California, or local executive officer or governing body. A three-day right to cancel must be provided in all other circumstances. A home improvement contract must include either a three-day or, if applicable seven-day, right to cancel form using specific language. See Bus. & Prof. Code §7159(e)(6) and (7) for specific language.
Do home improvement contracts have to be stipulated sum (i.e., fixed price) contracts or can they be time and material (i.e., cost plus fee) or guaranteed maximum price contracts (GMP)?
This is a serious drawback of the statute as I see it, although I also understand the rationale behind the statute, which is to provide a “simple” construction contract for consumers. A home improvement contract may only be a stipulated sum contract. Let me repeat that. A home improvement contract may only be a stipulated sum contract. No time and material or GMP pricing is allowed. This can create problems for contractors who aren’t building to plans or where the plans don’t provide the necessary detail for contractors to accurately estimate their costs. The solution in these situations: Build the risk into your stipulated sum contract price. Yes, you may not get awarded the project. But, it’s a lot better than being underwater on a project.
Can contractors charge a “mobilization” fee in addition to, or in lieu of, the “Downpayment” provision under the statute?
The statute provides that any downpayment may not exceed $1,000 or 10% of the contract price, whichever is less. Some contractors try to get around this, sometimes for reasonable reasons such as long lead times for certain items like windows, doors and cabinets in which a contractor must pay a material supplier a deposit exceeding $1,000, by including a “mobilization fee” or “start-up fee” of many thousands of dollars immediately after beginning work. Contractors who do this should know that they are taking a risk. In fact, I would say that, if the charge isn’t legitimately for “mobilization” costs billed after the fact, it is illegal under the statute which prohibits contractors from collecting payment for “work not yet completed” and “materials not yet delivered.”
Can contractors invoice progress payments based on the percentage of work completed rather than based on set dollar amounts for certain milestones achieved?
Many contractors are used to billing based on percentage of work completed. For example, if a contractor has completed 20% of framing, the contractor will bill 20% of the value of framing as set forth in a previously agreed-upon schedule of values, typically, monthly or some shorter period such as every two weeks. You can’t do this in a home improvement contract. The statute requires that progress payments be set forth in “dollars and cents” and be tied to “the specific work or services to be performed and materials and equipment to be supplied.” For contractors, the lesson here in order to keep your cash flow moving in order to pay for labor and materials, is to carefully negotiate the progress payment schedule so that you don’t find yourself getting your first payment after drywall is completed in a whole-house remodel.
Can owners insist on a “hard” completion date rather than the “Approximate Completion Date” as provided under the statute?
Contractors aren’t the only ones who have to make adjustments when entering into home improvement contracts, buyers do as well. Typically, a buyer will insist on a “completion” or “substantial completion” date that is a hard date, not an “approximate” date, when construction will be completed or substantially completed. Some owners, based on this “hard” date, will also include liquidated damage provisions providing that if construction is not completed or substantially completed by the hard date, the contractor will owe the owner liquidated damages, typically, on a per-day basis. It’s hard toprovide that certainty when the statute provides that a home improvement contract is to include the heading “Approximate Completion Date” followed by the approximate date of completion. Here’s the solution: While the statute sets forth what must be included in a home improvement contract, it doesn’t set forth what may be included in addition to what is set forth in statute. As such, if I were representing an owner, I would try to negotiate a hard “not-to-exceed” date beyond the “Approximate Completion Date.”
Can you include provisions other than what is set forth in statute?
Yes. The statute sets forth what must be included in a home improvement contract. It doesn’t set forth worth what may be included in a home improvement contract beyond what is set forth in statute.