Home Improvement Contracts and Time and Materials Pricing

A recent legal presentation at Graniterock’s Concrete and Building Materials Expo has generated a lot of discussion.  One of our speakers told the audience that it is unlawful for a contractor and a homeowner to enter into a contract for home improvement work where the price term is based on “time and materials” (“T&M”).  Several in the audience were surprised to hear this, and questioned whether the statement is true.  After all, T&M contracting is relatively common, and when done correctly is a good way to ensure a fair price for both parties to the contract. 

Under a T&M contract, the owner pays for the contractor’s actual labor and materials, plus an agreed mark-up.  A T&M contract has some advantages over a fixed price or lump sum contract, especially where a project may present some “unknowns.”  A T&M contract can ensure the contract price is neither overly inflated to account for unknown contingencies (such as how much water damage the contractor really will find once the walls are opened up) nor so understated that the contractor takes the risk of those contingencies and sustains a loss.  T&M contracts are also ripe for abuse, because an unscrupulous contractor has no incentive to bring the contract in at a firm price, and may abandon efficiencies in favor of more labor billing and greater revenue. 

Despite the virtues and common use of T&M contracts, our speaker was absolutely correct.  The Contractor’s License Law has determined that the potential for abuse of T&M contracts outweighs any apparent virtue, and prohibits T&M contracting for home improvement contracts between an owner and contractor.   

“Home improvement contract” is a defined term under the California Contractor’s License Law.  It is a contract between a contractor and a homeowner or tenant for a “home improvement.”  California Business and Professions Code (B&P Code) section 7151.2.  The B&P Code contains a lengthy definition of “home improvement,” the shortened version of which is any work to an existing residential property.  B&P Code section 7151.  The term “home improvement” does not include the construction of a new residence on a vacant lot, but does include building new structures (like decks, outbuildings, or fences) on property with an existing home.

Home improvement contracts are highly regulated.  For example, the License Law sets forth numerous terms and conditions that must be included in a home improvement contract.  One of those is a section for “Contract Price,” which must state “the amount of the contract in dollars and cents.”  B&P Code 7159(d)(5).  A home improvement contract must also have a section for a schedule of progress payments, and each progress payment “shall be stated in dollars and cents and specifically reference the amount of work or services to be performed and any materials or equipment to be supplied.”  B&P Code 7159(d)(9)(B).  These rules do not leave any room to price a home improvement contract on a T&M basis, since a T&M price term is not stated in “dollars and cents.”  If there is any doubt about that, the Contractor’s License Board interprets these provisions of the law to mean that home improvement contracts must be made on a lump sum or firm fixed price basis, and that T&M contracts are not allowed.  See, e.g., CSLB Newsletter, California Licensed Contractor, Summer 2010.  Change orders to home improvement contracts also must be on a fixed price basis.  B&P Code 7159.6.

Contractors that violate these requirements are subject to disciplinary action by the License Board, and their contracts could be declared void in any legal action with the owner.

There are some exceptions worth noting.  First, remember that new home construction is not “home improvement” under the License Law, so contracts for constructing a new home on otherwise vacant land could be made on a cost-plus fee basis (there are separate rules for contracts for new home construction to be occupied by the owner, but they do not include the T&M prohibition).  Also, the home improvement regulations only cover prime contracts—those made directly between the home owner (or tenant) and the contractor.  Subcontracts for residential work between trade contractors and the prime contractor are not home improvement contracts, and may be made on a T&M basis.