So, what is a consumer to do? How big of a down-payment or deposit should the consumer hand over? The answer is simple.
Over the past year, one of the most common situations we encountered was when homeowners paid a large amount of money up-front to a contractor, only to be left in a lurch when the contractor delayed, made up excuses, and ultimately never completed or even began the work. While the contractor’s delays and failure to perform are illegal, deceptive, unfair, and potentially criminal, that doesn’t by itself help a family that paid thousands or tens of thousands of dollars for a necessary home improvement.
Yes, the homeowner often can and should file a civil suit. Yes, the theft is usually a crime (theft by deception or some other form) and should be reported to the local police department. But what if the contractor spent the money on something else? What if the contractor owes a lot of money to a lot of people? What if the police refuse to investigate the financial crime? In these cases, it may be practically impossible to get the full amount of stolen money back in a civil suit, or as restitution.
So, what is a consumer to do? How big of a down-payment or deposit should the consumer hand over? The answer is simple: however much the consumer is willing to lose. In some cases, the law limits the deposit to 10% of the total project.
When you hire a contractor, everything should be negotiable. Everything. We usually only think about negotiating amounts of money, and even then we often don’t do that because it is uncomfortable. When is the last time you negotiated your pay at work?
You can and should attempt to negotiate portions of the contract that you find troublesome. If you don’t like a clause in a contract (like an arbitration or liquidated damages clause) consider crossing it out and initialing the change before you sign and return it to the contractor. If the contractor accepts the changes you want, then you have won a negotiation.
Negotiation needs to happen before you sign the contract, and before you make any payments to the contractor. If you try to negotiate after the contract is signed, that is often referred to as “reneging,” which is short for “renegotiating.” Negotiating after the deal is struck could put you in breach of the contract. If you try to negotiate after the contract is signed, remember that the contractor can hold you to the original agreement, and if they are willing to make a change, they are more likely to want something in return. If you do negotiate a change after the contract is signed, make sure you put the change in writing, and get it signed the contractor. These changes after the contract is signed are sometimes referred to as written change orders.
In general, no matter the size of your project, consider negotiating the payment schedule or down-payment amount. If your contractor wants you to pay too much upfront, consider pushing back and saying you’re more comfortable with a lower amount. The contractor may ask for something in return, so be prepared for some counter-offers and further negotiation. Before you have an agreement, the worst thing the contractor can say is “no,” in which case you will need to decide if working with this contractor is worth the risk. If it is, you can agree to their terms. If not, you will need to go with another contractor.
If you agree on a change, even before the contract is signed, make sure you change the written contract to reflect the new agreement. Agreeing on something orally or with a handshake is meaningless if you later sign a written contract that differs from, or does not include, your previous agreement. If you have no written contract whatsoever, you need to insist on one.
You will also want to look into the work history, experience, longevity, and litigation history of your contractor and the person that owns the company. We just obtained a judgment against a company called Brycon Renovation, LLC. Brycon was declared to have violated our clients’ rights, and to have committed multiple acts that were unfair, deceptive, or otherwise in violation of the Ohio Consumer Sales Practices Act (CSPA). While nothing would have popped up before our recent case, if you were about to hire this contractor now, you could look them up in the Cuyahoga County Common Pleas Court docket, and you would see the case and the judgment, which you could read because it is a public record.
If you research contractors before hiring them, you may be surprised about what you find, and happy that you found it sooner rather than later. Check with the attorney general Consumer Complaint database, check the court records from multiple area courts (common pleas and municipal courts), check reviews on websites like the BBB, and do this before you hire someone. Consider looking up their business with the Ohio Secretary of State’s office to see if it even exists.
Before we go further, and discuss more specific protections and concerns, we need to break these construction projects down into two types: larger projects ($25,000+) and smaller projects (less than $25,000). The law sometimes treats these projects differently.
Larger Projects – Contract Prices of $25,000 or more
Under Ohio’s 2012 Residential Construction Service Supplier Act, R.C. 4722.01 et seq., contractors are often prohibited from asking for more than 10% of the total contract price as a down-payment before work begins. The contractor can request that you pay 75% of the cost of any special order items that cannot be returned or reused. Regardless of the maximum rate in the law, remember you can always try to negotiate a lower rate.
This law may not apply to your project, even if the project is for more than $25,000. Assuming you own the property, and you hired a contractor that has sufficient insurance to build a new home, structure, or addition, this law likely will apply to your $25,000 + project. However, if you hired a contractor on a cost-plus basis (where they charge you their actual out-of-pocket labor and material costs, plus an additional amount), which you should almost never do (more on this in the future), then this 10% limitation does not apply to you.
For example, if you are having a brand new addition built on your home for $60,000, but aren’t getting any special order items installed, the most you can be requested to pay as a down-payment before work starts is $6,000. Once work begins, if you previously agreed to pay more, you can be forced to pay more.
On the other hand, if you are having the same addition built, but it is going to cost $75,000 because of a $15,000 set of custom made-to-order cabinets, the contractor might be able to force you to pay between $11,250 and $18,750 ($7,500 + $11,250) as a down-payment before work starts. I give a range because the law is a little ambiguous, and could be interpreted to say the 75% of custom items is in addition to the 10%, or the 75% of the custom items is in lieu of the 10%. That will eventually be worked out by the courts or clarified through amendment later.
Smaller Projects – Less than $25,000
On smaller projects, there is often no legal limit or maximum for a down-payment. Here, negotiation is even more important. We have seen the contractors we sue demand anywhere between 10% to 50% of the total project price upfront. Putting 50% or even 25% down as a deposit is dangerous, and may be excessive for your project. What happens if you pay a contractor $12,500 upfront? Can you afford to throw that money away if they disappear on you? Can you afford to pay it again to a replacement contractor? As a consumer, you want to keep that initial deposit amount as close to 0% as practicable. Clearly there is room to negotiate.
It is important to point out that legal protections for consumers on these smaller projects do exist. First, contractors must give a written receipt to the consumer that states whether the deposit is refundable or non-refundable. Second, the contractor is legally prohibited from using the deposit for anything other than the consumer’s project or work. Before you let your contractor walk away with your deposit, you need to have a written and dated receipt in your hand. Don’t settle for “we’ll send you one later,” and don’t think that you don’t need the receipt because you can get the check image from your bank later. You would be amazed how often contractors claim they never received payments when they did.
Courts in Ohio treat these receipt violations very seriously. Many courts will award a consumer triple the amount paid as deposit if the contractor failed to provide one of the receipts mandated by law. For example, if a consumer pays $4,000 as an initial deposit, but a contractor does not provide a receipt, the consumer could be entitled to recover $12,000 later. Receipts are important.
More often than not, we see contractors breaking each and every one of these laws. When you do make a down-payment or deposit payment to a contractor, insist on getting a receipt, and insist that it be a reasonable amount in relation to the project.
There is no way to prevent theft in all cases. The only way to prevent that is to never hire a contractor. That’s unrealistic for most of us. Instead, take some precautionary steps. Check out the contractor, research them, negotiate the down-payment amount, make sure they aren’t charging you too much upfront, and always insist on getting your receipts at the time the payment is made. Otherwise, you may need to find a new contractor