This week’s sentencing of Stratham contractor Gerard Thibault to 10-30 years in state prison for taking over $2.4 million in down payments from customers without performing the work carries a message for residential customers and contractors. Unscrupulous builders, though rare in New Hampshire, are out there. How can their customers protect themselves?
While paying for labor and materials only as the work progresses may be ideal from the homeowner’s perspective, it is not always realistic. Many contractors are relatively small operations without the capital to fund initial purchases from their own reserves, and need initial deposits to buy the materials. The homeowner’s concern here is in ensuring that a deposit requested for his or her project is actually used solely for that purpose. This requirement should be written into the parties’ contract, along with a provision that tools or equipment usable on future projects will not be purchased with the deposit.
Some homeowners think that by purchasing materials directly they can avoid the need for a large deposit and gain a measure of protection. Many contractors resist this, believing that they will lose not only some of their expected profit, but control over the project as well. And often they are correct. From the homeowner’s perspective, buying their own materials entails the risk that if a directly purchased product fails, they will have no recourse against the contractor. Disputes may arise over whether a product failure was or was not due to faulty installation, disputes that would be avoided if the contractor had furnished the product.
Contractors seek upfront deposits for more than just purchasing materials. Deposits demonstrate owner commitment, securing the contractor’s time. Moreover, payroll, fuel, and general overhead expenses don’t lend themselves to net-30 terms, and contractors need assurance that their customers won’t stiff them and leave them short when these expenses come due. Financially speaking, the contractor wants to stay ahead of the customer – just as the customer wants to stay ahead of the contractor. Striking the balance is a matter of negotiation.
If a construction lender is involved, it may disapprove of a significant upfront payment to the contractor. As mortgagees, lenders want equity cushions for themselves, not for contractors. Large deposits can negatively impact the homeowner/borrower’s financial strength if things go south and the loan falls into default.
A contract provision requiring the contractor to use a deposit solely for the depositor’s project is not prophylactic. Preventing the contractor from using the deposit for other purposes entails segregating the deposit from the contractor’s general operating account in a separate escrow account, and requiring homeowner sign-off for disbursements. I sometimes see this employed on major projects. Particularly where the contractor has credit terms with a lumber yard or supply house (homeowners should be circumspect about hiring a contractor who doesn’t!), producing the seller’s invoice as a prerequisite to sign-off can work well.
Even without homeowner sign-off, requiring a separate escrow account to hold the deposit until disbursed for the depositor’s project, if coupled with language creating a fiduciary duty on the part of the contractor to use the deposit only for project specific expenses, may offer some protection to the homeowner in the event of the contractor’s bankruptcy. Trust funds are generally not deemed part of the bankruptcy estate under 11 U.S.C. § 541(d). And an individual contractor’s use of the fund for other purposes in breach of fiduciary duties may be enough to avoid a discharge under 11 U.S.C. § 523(a)(4).
Some states impose caps on the amount of the deposit. Massachusetts and Pennsylvania limit them to one-third of the total price (except for special-order materials like custom windows or cabinets). Maine limits them to one-third of the total price absent a signed written waiver. While New Hampshire law has no such cap, any request for more than a third upfront should be viewed with skepticism, especially on labor intensive projects.
The New Hampshire Department of Justice has published guidance recommending that "Consumers should always ask contractors to provide an itemized list of what their initial deposit will cover." It's not a bad suggestion.
While paying for labor and materials only as the work progresses may be ideal from the homeowner’s perspective, it is not always realistic. Many contractors are relatively small operations without the capital to fund initial purchases from their own reserves, and need initial deposits to buy the materials. The homeowner’s concern here is in ensuring that a deposit requested for his or her project is actually used solely for that purpose. This requirement should be written into the parties’ contract, along with a provision that tools or equipment usable on future projects will not be purchased with the deposit.
Some homeowners think that by purchasing materials directly they can avoid the need for a large deposit and gain a measure of protection. Many contractors resist this, believing that they will lose not only some of their expected profit, but control over the project as well. And often they are correct. From the homeowner’s perspective, buying their own materials entails the risk that if a directly purchased product fails, they will have no recourse against the contractor. Disputes may arise over whether a product failure was or was not due to faulty installation, disputes that would be avoided if the contractor had furnished the product.
Contractors seek upfront deposits for more than just purchasing materials. Deposits demonstrate owner commitment, securing the contractor’s time. Moreover, payroll, fuel, and general overhead expenses don’t lend themselves to net-30 terms, and contractors need assurance that their customers won’t stiff them and leave them short when these expenses come due. Financially speaking, the contractor wants to stay ahead of the customer – just as the customer wants to stay ahead of the contractor. Striking the balance is a matter of negotiation.
If a construction lender is involved, it may disapprove of a significant upfront payment to the contractor. As mortgagees, lenders want equity cushions for themselves, not for contractors. Large deposits can negatively impact the homeowner/borrower’s financial strength if things go south and the loan falls into default.
A contract provision requiring the contractor to use a deposit solely for the depositor’s project is not prophylactic. Preventing the contractor from using the deposit for other purposes entails segregating the deposit from the contractor’s general operating account in a separate escrow account, and requiring homeowner sign-off for disbursements. I sometimes see this employed on major projects. Particularly where the contractor has credit terms with a lumber yard or supply house (homeowners should be circumspect about hiring a contractor who doesn’t!), producing the seller’s invoice as a prerequisite to sign-off can work well.
Even without homeowner sign-off, requiring a separate escrow account to hold the deposit until disbursed for the depositor’s project, if coupled with language creating a fiduciary duty on the part of the contractor to use the deposit only for project specific expenses, may offer some protection to the homeowner in the event of the contractor’s bankruptcy. Trust funds are generally not deemed part of the bankruptcy estate under 11 U.S.C. § 541(d). And an individual contractor’s use of the fund for other purposes in breach of fiduciary duties may be enough to avoid a discharge under 11 U.S.C. § 523(a)(4).
Some states impose caps on the amount of the deposit. Massachusetts and Pennsylvania limit them to one-third of the total price (except for special-order materials like custom windows or cabinets). Maine limits them to one-third of the total price absent a signed written waiver. While New Hampshire law has no such cap, any request for more than a third upfront should be viewed with skepticism, especially on labor intensive projects.
The New Hampshire Department of Justice has published guidance recommending that "Consumers should always ask contractors to provide an itemized list of what their initial deposit will cover." It's not a bad suggestion.
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