Residential Construction Contracts: Top 10 Landmines to Avoid

Picture this: You’re in the middle of a home renovation project. Everything seems to be going smoothly until, suddenly, they aren’t.

Now the homeowner says you’ve breached the contract. They want you off the property, they say, and they’re bringing in somebody else. And there’s literally nothing you can do about it. 

Or imagine an even worse scenario. 

You get to the end of a job. From your perspective, it’s a job well done. The homeowner seems satisfied. But after you drive off the site, you get a call. The customer is demanding a full refund – and, incredibly, you find out you have to grant it.

These are nightmare scenarios — but they can come true if you are a homebuilder or renovator who doesn’t have your contracts in order. 

Ohio laws are very proactive toward homeowners and consumers, and appropriately so. However, it’s also appropriate for contractors to be fairly protected. 

In this article, we’ll cover the top 10 mistakes we’ve seen contractors make within their residential construction contracts. 

Along the way, we’ll explain some of Ohio laws governing homebuilding and renovation, and what they mean for you as a contractor. And finally, we’ll discuss how going too far to protect yourself in a contract can create potential legal troubles, and what you should do to avoid them.

1. Not Having A Contract

This may sound odd since the word “contract” is part of the job title, but it’s true: A lot of construction contractors don’t use contracts. 

Some people work with just a proposal. Others might go with an estimate of the scope of work and a price. And sometimes it’s the good ole’ handshake deal.  

While it might seem convenient to reach an agreement with a customer over just a couple of conversations, it’s a bad idea for a lot of reasons — lack of clarity, greater potential for misunderstanding, etc.

Also: It’s not legal. 

2. Not Complying with the Home Solicitation Sales Act

Here’s an issue that can actually force you to give a customer a refund – even if you’ve successfully completed the work. 

If you don’t use a written contract, or you use an inadequate contract, then you’re almost definitely not complying with another law imposed on construction contractors: the Home Solicitation Sales Act (“HSSA,” O.R.C. 1345.21). 

The HSSA gives customers the right to cancel a residential construction contract within 3 business days of entering into it. 

3. Not Having A Clear Scope Of Work

The work involved in residential construction and remodeling can be very complex and detailed. Your contract should be too.

It is not enough to state in a proposal, “Contractor to remodel master bathroom per Homeowner’s drawing.” Before bidding on the work, preparing a proposal, or entering into a contract, a contractor must ensure the homeowner’s objectives are clear and complete.  

Remember, most customers have never done this before, so they’ll be relying on you to be their “expert.” They may not understand the effects that their decisions — or indecision — can have on the project as a whole. 

4. Not Having Clear Pricing

Let’s say you and your customer agree on the price for their project. That’s great. But are you sure the two of you are speaking the same language about what that price means? 

Home construction contracts broadly follow one of two formats:

  • (A) Lump sum agreements, where the contractor receives a scope of work and submits a price to perform that work. 
  • (B) A cost-plus or a time-and-material agreement, in which the contractor simply passes its costs on to the homeowner, with a markup included somewhere. 

The determination of how the contractor will bill a customer must be made before work begins, and be in writing. 

5. Requiring Too Large of a Down Payment

There are at least four things every contractor must know about down payments: 

  1. If the project is a new home build, or a home remodel/repair costing more than $25,000, then a contractor cannot ask for a down payment of more than 10%. Anything beyond that violates the Home Construction Service Suppliers Act (HCSSA). (There are some exceptions for custom or specialty orders for equipment or materials.) 
  2. If the project is a home remodel or repair priced less than $25,000, there is no specific restriction on the down payment. But contractors must provide a written receipt for the down payment, and that receipt must state whether the deposit is refundable or non-refundable. 
  3. Once the contractor receives the initial deposit, they need to complete – or at least start – the work within 8 weeks. If they can’t, the contractor is supposed to inform the homeowner about the delay and offer to give the deposit back during the wait. 
  4. Contractors should document the receipt of any deposit, and how those funds are used.

6. Not Including a Completion Date or Time Period

Contractors know many different factors can affect their timelines. Homeowner decisions, delivery delays, other contractors, and (of course) the weather can all create setbacks. Therefore, many contractors do not like putting a completion date or duration in their contracts. 

Ohio law is not sympathetic.

For new home builds, the HCSSA specifically requires that contracts include the planned start and finish dates, or the anticipated duration of the work.  

For home remodels and repairs, the CSPA also requires an estimated completion date. And as noted earlier, under CSPA contractors have no more than 8 weeks from receipt of deposit to complete — or at least start — the work.  

7. Permits & Insurance

Permits can feel like a moving target in home construction, remodeling and repair. Permit requirements can vary from city-to-city and town-to-town. But three things are clear:

  1. Ohio law requires contractors to register with the local building department in every city where they work. 
  2. The law also requires contractors to licensed in lines of work where a license is required (e.g., plumbers, HVAC contractors, electricians, etc.).  
  3. Contractors must obtain all permits that are required by law for the work. 

Failure to register, or to obtain required permits, can be a violation of the CSPA. Which means if a homeowner can tie their damages in a dispute to the contractor not obtaining the permits, the homeowner may be entitled to treble damages (or 3X actual damages) plus legal fees. 

8. Changes in Writing

“When you’re finished changing, you’re finished.”  

When Ben Franklin said this, he very well could’ve been talking about construction.

Changes happen in construction on nearly every project, if not every project. Whether the job was designed by an architect, the homeowner, or you, once the work gets going, you can bank on something deviating from the original plan.  

Smart contracting includes a process for managing changes, and for communicating their cost and time impacts to the homeowner. 

In fact in Ohio, it’s the law.

9. Default & Cure Provisions

As a committed Buckeyes fan I hate saying this, but: 

On behalf of my contractor clients, there are some ways in which I wish we were more like Michigan. 

Before you throw a digital tomato at me, fellow Ohioans, let me explain why. 

In other states (like Michigan), a homeowner who’s hired a contractor for a home construction project can’t terminate that contractor without…

  1. Issuing written notice to the contractor of the alleged breach, and…
  2. Providing the contractor a reasonable opportunity to cure the breach before terminating the contract  

In Ohio, that is not the case.  

10. One-Sided Terms

Can you go too far to protect your own interests within your contracts? 

Ohio law says you can – and enacts pretty stiff penalties if you do. 

Under the Consumer Sales Practice Act (Ohio Revised Code section 1345.03), a court can find that a contractor committed an “unconscionable act” if the contractor “required the consumer to enter into a consumer transaction on terms the supplier knew were substantially one-sided in favor of the supplier.”  

Home construction contractors, by now you’re terrified, or annoyed, or both, with what you’ve read.  It’s better than being ignorant.  Give us a call; reference this article and get a free 30-minute consultation with one of your construction lawyers to make sure you’re on the right track, or to guide you to the next steps of better protecting your construction business and avoiding these nightmares!