Home Improvement: Contract Tips

Improving your home is a key part of home ownership. When using a contractor understanding the contract is key.

Improving your home is a key part of home ownership. When using a contractor understanding the contract is key. This article provides tips for ensuring your home improvement project goes smoothly.

Topics on this page:

• Selecting a Contractor
• Licensed Contractors
• Home Improvement Contracts
• Get Proof of Insurance
• Contract Terms to Watch Closely
• Final Payment
• Permits
• Laws and Regulations

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 and always hire a contractor who is licensed with the Maryland Home Improvement Commission (MHIC). Even if it is a “small job,” there are a few steps that you should take to protect yourself. Many experts recommend interviewing at least three contractors before hiring a contractor for you home improvement project. 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. Here are some tips that will help every homeowner.

Licensed Contractors

Always select a contractor that is licensed with the MHIC. Ask for the contractor’s MHIC license number and check to make sure their license is up-to-date. You can find out if a contractor is licensed at the Department of Labor's website. Even if you don’t know the contractor’s license number, you can search for that person by name. You can also call MHIC and ask if any complaints have been filed against the contractor and, if so, whether the complaints have been resolved.

If you have problems with the work the contractor does for you or if the contractor fails to complete the work, so long as the contractor is licensed, you can file a complaint against a contractor or salesperson with the MHIC. After MHIC completes its investigation of your complaint, you may be eligible to file a claim with the MHIC Guaranty Fund to try to receive compensation for your loss. If you hire an unlicensed contractor or a contractor with an expired license, you cannot file a MHIC Guaranty Fund claim.

• See: How to File A Complaint FAQs
• See: Guaranty Fund FAQs

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 to be used, and the payments. No matter what the size of the contract, always put it in writing. A written contract will help you to enforce the agreement if anything goes wrong. Even if the contractor is someone you know, this is a business relationship and you should treat it that way. If you don't understand a term or provision, ask for an explanation before you sign.

MHIC has specific requirement that must be included in every home improvement contact:

Contractor's Name, Address, and MHIC Number

A home improvement contract must contain the name, address, and MHIC license number of the contractor. If a salesperson sold or solicited the job, the contract must also contain the name and license number for each salesperson involved.

Notice for Homeowners

Each home improvement contract must contain a notice that gives the telephone number and website of the MHIC and states, “each contractor must hold a current MHIC license, and anyone can ask MHIC about a contractor.” The address for MHIC is 1100 N. Eutaw St., Room 121, Baltimore, Maryland 21201. The telephone numbers are 410-230-6231 and 1-888-218-5925. MHIC’s website.

MHIC regulations require that every home improvement contract contain the following notice:

1. 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

2. A homeowner has the right to purchase a performance bond for additional protection against losses not covered by the Guaranty Fund.

Dates and Description

The contract must contain the approximate dates when the performance of the home improvement will begin and when it will be substantially completed.

Deposit and Payments

The contract must clearly state the price that you and the contractor agree upon for the entire job. A contractor may not accept more than 1/3 the contract price as a deposit and may not accept any payment until the contract is signed. You are free to negotiate any payment terms beyond the 1/3 deposit with the contractor. The contract must include the number of monthly payments and the amount of each payment, including any finance charges.

Mortgages or Liens

If you borrow money to finance your home improvement project by securing an interest in residential real estate, on the first page of the contract there must be a written notice that says, “This contract creates a mortgage or lien against your property to secure payment, and may cause a loss of your property if you fail to pay the amount agreed upon. You have the right to consult an attorney. You have the right to rescind this contract within 3 business days after the date you sign it by notifying the contractor in writing that you are rescinding the contract.”

Arbitration Clause

Before you sign the contract, it is very important to make sure you know if the contract contains an arbitration clause. If you and the contractor have agreed to include a mandatory arbitration clause in the contract, it must include the name of the person or organization that will conduct the arbitration, whether any mandatory fees will be charged to the parties for arbitration and list the fee schedule, whether the arbitrator’s findings are binding, and a disclosure that a claim against the MHIC Guaranty Fund will be stayed until completion of the mandatory arbitration proceeding. You and the contractor must initial and date the arbitration clause.

Door-to-Door Sales Act

Your home improvement contract may also be covered by the Maryland Door-to-Door Sales Act. If it is, the contractor must include additional information in the contract. A contract covered by the Door-to-Door Sales Act must include a notice that states that “you may cancel the transaction at any time prior to midnight of the fifth business day, or midnight of the seventh day if the buyer is at least 65 years old after the date of the transaction.” A separate "Notice of Cancellation" form must be attached to the contract and filled in with the information about how to cancel the contract.

The Door-to-Door Sales Act is enforced by the Attorney General's Consumer Protection Division. For more information or to file a complaint, please visit the Attorney General's website. Residents of Howard and Montgomery Counties can also report violations to the County Office of Consumer Protection - Howard County or Montgomery County websites.

• Read the law: Md. Code, Commercial Law, §14-301

Copy of the Contract

Before the contractor begins any of the work, he or she must give you a copy of the contract, signed by the contractor.

Remember, a contract is a legally binding document so it is important to understand what you are signing. Make sure the contract is in writing, legible, that you understand it, and that you and the contractor have both signed it before the work begins.

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 others who will work on a job.

1. You need to be protected from anyone who is injured on the job who might sue you.
2. You need to be protected from any damage that the contractor may cause to your property. Look at your homeowner’s 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.

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.

  Final Payment

  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.

  Permits

  Remember that some jobs will require permits. It is the contractor’s duty to secure every permit, license, or special exception necessary to properly complete the job according to applicable state or local building laws. Make sure the contractor is going to obtain any necessary permits and that the cost of the permits is included in your contract. Even if you are able to make changes now without a permit, you will have a problem when you try to sell the property. Ask the contractor to show you the permit before the work starts.

  Laws and Regulations

  • Code of Maryland, Business Regulations, Title 8: Home Improvement
  • Code of Maryland Regulations
  • Proposed Regulations