Real Estate & Development

Attention Contractors: Does Your Home Improvements Contract Contain The Minimum Standards?

January 2009

By Erik Newman*

Contractors seeking to minimize costs during this recession should insulate themselves from claims and expenses by implementing minimum contract standards for conducting business with their customers. Revisiting this essential business practice is timely because the New Hampshire Legislature will consider a bill in the 2009 session that would require written home improvement contracts.

The “contracts bill” introduced in the N.H. Senate applies broadly to construction, renovation, repair, demolition, modernization, and conversion of residential structures whenever the value of the construction is $10,000 or more. The bill requires a written agreement containing a reasonably detailed description of the improvements and estimated dates of commencement and substantial completion. Also required is a statement of the total contract price, schedule of payments and amount of any down payment, or, alternatively, the terms by which payment for labor and materials will be charged. The final requirement is a statement of the notice and opportunity to cure provisions that are a precondition to litigation under New Hampshire law.

Contractors seeking comprehensive protection from liability should also consider including additional contract terms. The scope of work description should be comprehensive, not only “reasonably detailed” as required under the proposed law. For example, it should reference plans or approvals and specify whether design or engineering fees are included. The written scope of work should be tailored to a particular project and should exclude material and labor expenses related to unexpected circumstances that may be encountered, including, for example: testing, removal and disposal of any materials containing mold or asbestos; repair of damage to concealed utilities not located on plans given to the contractor; removal of ledges, boulders or rocks; removal and replacement of existing rot or insect infestation; and any public or private utility connection fees.

Changes to the scope of a contract can frequently be a source of disagreement among a contractor and his or her customer. Setting written expectations in the contract itself can help avoid disagreements that might otherwise arise. One essential practice is to require a signed change order for any deviation from the contract scope that results in a revision to the contract work scope or price. Some customers may assume that changes called for by inspectors are covered in the contract and if that is not the case, it is important to specify that those changes would also require a change order. One might also consider including a statement that corrections for existing code violations which may be revealed in the course of performance, such as inadequate wiring and deteriorated structural elements, are not included in the contract price and require a change order.

While many customers are content to stay out of the way during a project, every project has the potential for customer interference issues to arise. The contract should include a work stoppage provision stating that if the customer’s actions contribute to work stoppage, either directly or indirectly, for a specified period of time, the customer will be deemed to have breached the contract. That way, a customer’s interference may amount to an act of default, possibly entitling the contractor to any breach and liquidated damages remedies. It is helpful to include a statement in the contract that the contractor’s access to the construction site shall be uninterrupted, whereas the customer is required to stay clear without an appointment.

Litigation can be expensive. This expense could be minimized if your customer contract expressly requires voluntary dispute negotiation and/or mediation in the event of a disagreement. Dispute negotiation and mediation can provide a more cost-effective opportunity to resolve a dispute in lieu of litigation. The American Arbitration Association has developed specific procedures for construction industry mediation which can lend an equitable and organized structure to dispute mediation.

A carefully drafted contract not only insulates against some avoidable liability, but sends an important message to potential customers about a contractor’s level of professionalism and accountability. A customer contract can distinguish your business from other similar service providers. Any manner of standing out is particularly important in times such as these when there are fewer customers pursuing construction projects.

Consider taking this moment to conduct a “liability self-audit” of your customer contract business practices. Strengthening the terms of your customer contract may yield significant cost savings by avoiding potential liability and expenses on future projects.

* Erik Newman is admitted in New Hampshire.

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