What You Need to Know About Home Improvement Contracts

California Construction Law Blog | Nomos LLP

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:

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:

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.