Time and Materials Contracts-Are They Illegal in Massachusetts?
I must admit, this question has been plaguing me as it pertains to Massachusetts. This issue applies to residential renovation only, but I know of many high-end contractors who use this method for their projects.
Section 2. (a) Every agreement to perform residential contracting services in an amount in excess of one thousand dollars shall be in writing and shall include the following documents and information:
(1) the complete agreement between the owner and the contractor and a clear description of any other documents which are or shall be incorporated into said agreement;...
(4) a detailed description of the work to be done and the materials to be used in the performance of said contract;
(5) the total amount agreed to be paid for the work to be performed under said contract;
Given that a Time and Materials Contract does not have a price, I would argue that it violates the Home Improvement Contractor Law. Further evidence to support that belief was supplied by the Office of Consumer Affairs and Business Regulation. They administer the Home Improvement Contractor Arbitration Program that is run by the state. The program is supposed to provide consumers (and contractors) with a more economical alternative to resolving disputes than litigation and does not require the parties to hire attorneys.
The Office of Consumer Affairs and Business Regulation recently rejected a claim filed by a colleague because they said that the Time and Materials Contract made it ineligible for the program.
The purpose of a Time and Materials Contract is theoretically to protect both the owner and the contractor. The owner is only paying for the cost of the actual materials (usually with a mark-up) and the actual hours worked. The contractor does not run the risk of under-bidding a job and much of the risk is removed because he is paid for all of the actual effort expended. These kinds of contracts can be fraught with problems because homeowners frequently question the amount of time spent and are frustrated if the contractor cannot substantiate his records. That said, as long as the contractor stays in constant communication with the owner (I believe in weekly meetings), they can work well. They also allow for instantaneous change orders to keep the project within budget.
However, when one looks at the statute, it requires, "the total amount agreed to be paid." Contractors should keep in mind that any violation of M.G.L. c. 142A is an automatic, per se violation of the Consumer Protection Act, M.G.L. c. 93A. Under that law, the consumer may obtain up to double or triple damages, attorney's fees, interest and costs in a verdict against the contractor.
So, a colleague has suggested that one way to avoid this issue is to include a guaranteed maximum price (GMP) in your contract. The GMP could be adjusted if necessary when a change order occurs. It is also important to include a detailed scope of the work to validate that price. I strongly urge all of you to include a GMP in your contracts and make sure that you ask for no more than one-third of that price for your deposit (unless the deposit also includes the cost of custom materials).
I cannot guarantee that this will avoid the question of the legality of Time and Materials Contracts, but we will not find out until this solution is tested in the courts.