Ted Degenhardt | Clark Hill
“The beginning of wisdom is to define.” (Aristotle)
A well-drafted contract defines each party’s rights and obligations, bringing wisdom to the transaction. In order to avoid potential disputes and minimize contractual risks, it is important to understand the specific provisions that are either required or helpful to include in construction contracts. Whether you are the owner, contractor, subcontractor, or supplier, you should fully understand, identify, and negotiate necessary contractual provisions and terms for your benefit. While there are likely additional contractual provisions with which parties should familiarize themselves, the summarized provisions below will provide a solid foundation for your next contract undertaking.
1. Residential Improvement Contract Requirements
Many states have specific requirements for residential (home improvement) contracts, which if absent from the contract may have serious consequences for the contractor. It is prudent for every contractor to be familiar with the state’s requirements for residential home solicitation contracts. This section will address some of the specific contract requirements and key provisions required under Michigan and California home improvement contracts, as examples of required terms.
In Michigan, all parties should consider the following provisions:
- Contractor Identification: A contactor performing residential construction or remodeling greater than $600 must have a Residential Builder or Maintenance & Alteration Contractor license issued by the Michigan Department of Licensing and Regulatory Affairs. The contract must identify the contractor by name and include their state license number. Residential contracts often fail to include the required identification causing potential issues as the project progresses and disputes arise over the quality of the work.
- Project Description/Details: The contract should include a clear, detailed and specific scope of work to be performed, identify particular materials and products to be used, and reference any required drawings or specifications. A very detailed scope of work along with finalized drawings can avoid unnecessary change orders during construction and disputes over work included and/or not included in the scope of work.
- Contract Price & Payment Terms: The Contract should identify a total contract price and whether it is lump sum or cost plus, and a detailed written payment schedule, including any required down payment. There should be a detailed payment schedule included setting forth the due date for all payments to be made, including the final one, to avoid unnecessary disputes over payments.
- Lien Information: An owner or lessee must prepare a notice of commencement, record it with the register of deeds in the county where the property is located, and post a copy at the construction site before any work begins. A contractor has the right to lien the property/project if the owner fails to pay. Including these express provisions in the contract notifies and informs the parties about the lien process prior to commencing the project.
In California, all parties should consider the following provisions:
- Written Contract: Home Improvement contracts must be in writing and identified as “Home Improvement Contract.” The contract must contain the name, business address, and license number of the contractor and if a salesperson was involved, their name and registration number.
- Project Details: The Contract must include a description of the project, contract price, the work schedule, including the approximate start and completion dates.
- Payment Details: The maximum down payment that may be required is the lesser of $1,000 or 10% of the contract price. For projects with progress payments, there must be a description of the work with corresponding progress payment to be made upon completion of said work.
- Notices Required to Be Included: Under California law, a Home Improvement Contract must contain several notices, with the specific language for the notices provided in California Business & Professions Code7159, including, but not limited to, notices regarding maximum down payment allowed, schedule of progress payments, the requirement for a completed and signed copy of the contract to be provided to the owner, and how extra work is treated. In addition, California Home Improvement Contracts must also attach the following documents: Mechanic’s Lien Warning, Contractor’s Board Notice, a Three-Day Right to Cancel Notice, Performance of Extra or Change-Order Work Notice and information about commercial general liability and worker’s compensation insurance.
2. Dispute Resolution Clauses: At the time of contracting, there are a few ways parties may choose to address, handle and resolve their disputes. In the event a dispute arises on a project, parties will be required to proceed with the previously agreed upon dispute resolution procedure in the contract. For example, parties may agree to first meet and discuss the dispute in an effort to resolve it amongst themselves and their representatives prior to seeking relief in more formal ways such as a lawsuit in court or an arbitration. Parties may also agree to participate in a mediation before filing a complaint with the court or a demand for arbitration. Such provisions require the parties to pay for mediation equally and to mutually select a mediator. Commonly, the contract will solely identify either litigation or arbitration as the procedure for dispute resolution. There may be cost advantages for choosing one method over the other or multiple methods, so be sure to strategically choose the methods that work best for you.
3. Tariffs: Due to recent developments in connection with tariffs on imports, including on building materials, and to alleviate the burden of the unpredictable cost of materials needed on your construction project, you would be wise to include a “Price Escalation” clause in your construction contract. Typically, a Price Escalation clause will deem the cost of materials provided for in the construction contract, as the “baseline price” and declare that the completion date provided in the contract is based on the necessary materials being available at the time of construction. From these baseline points, the Price Escalation clause can address the increase in cost and time. For example, the clause can provide an increase in contract price if the cost of material increases by more than 5% compared to the baseline cost, or the time to complete the contract is increased by the number of days of delay caused by the unavailability of necessary material. Of course, to be fair to the property owner, the clause should require substantiating documentation. By including the Price Escalation clause in your contract before construction, you can hopefully avoid disputes later if cost increases and delays arise.
The above information is intended to provide guidance for a contractor to be aware of potential requirements and beneficial clauses. Every contractor, however, must be well-informed about the contract requirements of the state where they conduct business, as the above is not intended to cover all requirements.
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.