Home Improvement: Contract Tips and Resolving Disputes

Categories :: Consumer, Consumer > Contracts

Selecting a Contractor

Home improvement is one of the areas in which consumers are often disappointed. One way to prevent problems is to take time with the contract. Even if it is a small job done by "locals," there are a few steps that you should take to make sure the job does not become more than you bargained for. Many experts recommend interviewing three bidders before hiring a contractor. This may not be practical for many low and moderate-income persons. But, if possible try to get estimates from at least two contractors, even if only by telephone. Frequently, the jobs are small and the cost of the job is relatively modest. Here are some tips that will help every homeowner.

Home Improvement Contracts

Contracts are mutual promises between two parties. You, the homeowner, will be asked to pledge to pay for services and materials required for the job. A written contract will spell out how the work should be done, the materials and the payments. No matter what the size of the contract, put it in writing. This will help to make the process easier. A written contract will also help you to enforce the agreement if anything goes wrong. Even if the contractor is someone you know, this will be a business relationship. And you should treat it that way. If you can't understand a term or provision, ask for an explanation before you sign.

Notice for Homeowners

Each home improvement contract must contain a notice that states, "Every home improvement contract must contain a notice that gives the telephone number of MHIC and states that each contractor and subcontractor must hold a current MHIC license and anyone can ask MHIC about a contractor or subcontractor." The correct address for MHIC is 500 North Calvert Street, Baltimore, Maryland 21202. The telephone numbers are 410-230-6309 and 1-888-218-5925.

For each contract signed after August 20, 2012, MHIC regulations require that the contract contain the following notice:

  1. Formal mediation of disputes between homeowners and contractors is available through the Maryland Home Improvement Commission;
  2. The Maryland Home Improvement Commission administers the Guaranty Fund, which may compensate homeowners for certain actual losses caused by acts or omissions of licensed contractors; and
  3. A homeowner may request that a contractor purchase a performance bond for additional protection against losses not covered by the Guaranty Fund.

This notice shall be included within the contract or, until July 1, 2013, may be included in an addendum attached to the contract, provided that the addendum is signed by the homeowner and contractor.

Remember, a contract is a legally binding document so it is important to understand what you are signing. The homeowner must receive a signed copy of the contract prior to the work starting.

The Maryland Home Improvement Commission has specific requirements for the form and content of every home improvement contract.

  •     The contract must be in writing and be legible.
  •     Must describe each document that it incorporates.
  •     Must include a description of the home improvement to be performed and the materials to be used.
  •     Must contain the approximate dates when the performance of the home improvement will begin and when it will be substantially completed.
  •     Must contain the name, address, and MHIC license number of the contractor. If a salesperson solicited or sold the home improvement, then the contract must also contain the name and license number of each salesperson.
  •     Must be signed by both parties.

Get Proof of Insurance

Get a copy of the contractor's current liability insurance certificate. The contractor must have accident and liability insurance for him (or her) self and all of the others who will work on a job.

  • First, you need to be protected from anyone who is injured on the job who might sue you.
  • Second, you need to be protected from any damage that the contractors may cause to your property. Look at your house insurance policy. Call your agency if you are not sure if injuries on the job will be covered by your homeowner's policy. This is your backup if the contractor's insurance does not cover injuries or damages.

Remember that some jobs will require building permits. Make sure that you and the contractor are clear on who will apply for the permits and pay the fees. Even if you are able to make changes now without a building permit, you will have a problem when you try to sell the property.

Contract Terms to Watch Closely

  • Square foot pricing - It is difficult to compare the costs of square foot bids. These bids do not detail the specific items such as the size of the framing boards. This means that you cannot be sure about the quality of the work and materials that each contractor has in mind when s/he makes the bid. If one person plans to use lower quality materials, you will be unable to see this when you compare square foot price bids.
  • "Allowances" - These are amounts that a contractor will include to cover for certain items that are not detailed in the bid, such as light fixtures. If the actual costs are higher than the "allowance" estimate, you must pay the difference. This will increase the overall cost of the contract. One way to avoid this problem is to pick out the items you want in time for the bid. Another way to avoid losing control of the costs is for you to shop for the general prices of the things that you are not yet ready to select. Write down the general cost of the items, such as light fixtures, that are like the ones you want. If you get more than one bid, keep in mind that each bid will be based on different assumptions about the allowances. This means that it will be harder to compare bids.
  • "Fixed Price" vs. "Time and Materials" Contract - These are two different ways in which the contractor can bill you.
    • "Fixed price" bids are considered to be standard in the industry. A fixed price means that the contractor has investigated all of the items related to the project. The contractor agrees that a certain price will cover all of the time and materials.
    •  A more uncertain agreement is called a "time and materials" contract. This is an agreement in which the contractor charges you as the job goes along. The contractor will charge you for his/her time and materials plus an added amount for profit. If it is a time and materials contract, make sure that the contract includes a maximum cost or "cap" on the price for the job. An open-ended "time and materials" contract can be an invitation to an unscrupulous contractor to run up the costs of the job. 

      Be very careful if the contractor is not clear about which type of contract s/he intends to use.

  • Payment Schedule - The contractor will ask for partial payments at certain points during the job. A contractor cannot accept more than 1/3 of the contract price as a deposit and may not accept any payment until the contract is signed. Also be careful about paying for more work than the work that has actually been completed. Small contractors may ask for an "advance" in order to purchase materials. Avoid paying for work that has not been yet completed. If the contractor fails to complete the job, you will need the money to pay someone else to complete the work that was left unfinished.
  • Change Orders - If you have an agreement that covers a set list of tasks and materials for a set price, you will be charged for any changes. It is a good practice to make these changes in writing. This allows both of you to agree about the change and the cost of the change.
  • Resolving Disputes - A lawsuit is one way to solve a dispute. But it can be expensive and take time. It makes sense to make sure there is another way to solve any disagreements. This is particularly true if the job is a small one and everyone involved is a person of modest means.

Don't make the final payment until:

  • the "punch list" (the list of final odds and ends) is done;
  • you receive copies of the warranties for any appliances, fixtures, roof shingles, etc. and
  • you are told, in writing, by each subcontractor that s/he has been paid.

Resolving Disputes with Contractors

Contact the Contractor

You should always start by reporting the problem to the contractor, clearly, in writing. Give him a reasonable opportunity to correct the problem.

Mediate

The Maryland Home Improvement Commission (MHIC) in partnership with Community Mediation Maryland and the University of Maryland School of Law's Mediation Clinic have developed a program to help homeowners and contractors amicably resolve disputes for the benefit of both parties. The project offers an opportunity a forum to reach a faster, easier, and cheaper resolution to conflicts. If successful, you will save time and money, and avoid the hassle of having to attend an administrative hearing. The best part is that mediation is free, voluntary and you decide whether or not to settle.

What happens if you don't settle?

If you do not reach an agreement, then the complaint will be investigated by MHIC to determine if the contractor violated the Home Improvement Law. Following the investigation, MHIC may elect to pursue regulatory charges against the contractor. In addition, you may have the opportunity to file a claim against the Home Improvement Guaranty Fund. If the claim is for more than $5,000, a hearing will be required. The hearing process, including possible appeals, may take 2 or more years to complete.

Finish the work and sue

You also could have someone else finish the work and sue the first contractor for the cost of completing the work.

  • You should first write a detailed letter to the contractor about the problem and give the original contractor a reasonable change to correct the work.
  • You should then get one or more detailed written estimates from someone else of the cost of completing the work in the original contract.
  • You may be able to sue the home improvement contractor without a lawyer in the Small Claims Court, located at the District Court of Maryland.  Your letter to the contractor, any reply he makes, and the estimates for completing the work are your evidence of the damages caused by his not completing the work properly. Very detailed step by step instructions about filing a small claims case in the Maryland District Court are online at the court's web site.

Source: 

This material was adapted by the Legal Aid Bureau from an AARP Legal Services Network publication in May 21, 2000 and the October 2003 issue of "This Old House" Magazine. It has been edited by Maryland Legal Assistance Network and Maryland Home Improvement Contracts - Maryland Home Improvement Commission. Edited by Mary Rice.
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