3.2 Contract Essentials: Requirements, Types, Terminology & When a Contract Binds
Key Takeaways
A valid contract requires an offer, acceptance, consideration, parties with legal capacity, and a lawful purpose.
R 338.1533 requires all agreements between a licensee and a customer to be written, signed, and copied to the customer, stating the specifications, cost, work, and materials.
A lump-sum contract puts the cost risk on the contractor, while a cost-plus contract puts it on the owner.
A counteroffer rejects the original offer, and acceptance must match the offer's terms to form a contract.
An in-home sale is binding only after the buyer's 3-business-day cancellation period ends, and a residential lien requires a written contract with a licensing statement.
The Elements of a Valid Contract
Every enforceable roofing agreement needs these five elements:
| Element | What it means on a roofing job |
|---|---|
| Offer | A definite proposal: scope, price, and terms, such as a signed proposal to tear off and reroof for $14,200 |
| Acceptance | Unqualified agreement to the same terms. Changing a term is a counteroffer, which rejects the original offer |
| Consideration | Something of value exchanged: roofing work for payment |
| Capacity | The parties must be legally able to contract. A minor or a person lacking mental capacity can generally avoid a contract |
| Lawful purpose | The contract must be for a legal object. An unlicensed contractor cannot enforce payment for licensed work (MCL 339.2412) |
Contracts may be express (written or spoken) or implied from conduct. Oral contracts can be enforceable under general law, but Michigan licensees must use written agreements, as explained below. The statute of frauds requires certain contracts to be in writing, such as those that cannot be performed within a year and those involving interests in land. Contracts for the sale of goods, including a roofer's purchase of materials from a supplier, fall under Article 2 of the Uniform Commercial Code (Michigan's 1962 PA 174), which PSI lists as a reference.
Michigan's Written-Contract Rules for Licensees
| Source | Requirement |
|---|---|
| R 338.1533(1) | All agreements and changes must be in writing, signed by the parties, with copies to the customer |
| R 338.1533(2) | The agreement must clearly state the terms, specifications (and for construction, plans and specifications), cost, type and amount of work, and type and quality of materials |
| MCL 339.2404a | The contract must include information on the licensee's individual license and any qualifying-officer license |
| MCL 339.2411(2)(h) | Deliver the entire agreement, including any finance charge |
| MCL 570.1114 | For a residential lien, the contract and every amendment must be written and include a statement that residential builders and M&A contractors must be licensed, and the contractor's license number |
LARA's homeowner guidance also recommends including start and completion dates, a statement that the contractor will get all permits, proof of liability and workers' compensation insurance, the warranty, cleanup, payment terms, and the right-to-cancel notice for in-home sales. Use it as a checklist when drafting your standard contract.
Contract Pricing Types
| Type | How the price works | Who carries cost risk | Common roofing use |
|---|---|---|---|
| Lump sum (fixed price) | One price for a defined scope | Contractor | Most residential reroofs |
| Unit price | Price per unit, such as per square or per sheet of replacement decking | Shared. Quantities vary, unit rates are fixed | Deck replacement "at $X per sheet as needed" |
| Cost-plus (fixed fee or percentage) | Owner pays actual cost plus a fee | Owner | Insurance restoration or unknown conditions |
| Guaranteed maximum price (GMP) | Cost-plus with a ceiling | Mostly contractor above the cap | Larger custom work |
| Time and materials | Hourly labor plus materials, often with a not-to-exceed amount | Owner | Leak investigations, small repairs |
Many residential reroofs combine two types: a lump sum for the defined roof plus a unit price for concealed conditions such as rotted sheathing. This keeps the base price firm and gives a written, agreed price for hidden damage.
Terms You Should Know
- Scope of work: the exact work included and excluded, such as number of layers removed, ice barrier coverage, flashing replacement, and ventilation.
- Specifications: product brands and lines, underlayment types, fastener schedules, and metal gauges.
- Allowance: a stated budget for an item not yet selected. The price adjusts up or down when the actual cost is known (Section 3.3).
- Addendum: a change to the bid or contract documents made before signing (Section 3.3).
- Change order: a written change after signing (Section 3.3).
- Liquidated damages: an agreed daily amount for late completion. It must be a reasonable estimate, not a penalty.
- Indemnification: one party agrees to cover the other's losses from stated claims.
- Force majeure: events beyond control, such as severe weather or supply disruptions, that excuse delay.
- Integration clause: the written contract is the entire agreement. This fits MCL 339.2411(2)(h).
- Retainage: a portion of each payment withheld until completion (Section 4.1).
When Is the Contract Binding?
Generally, a contract binds when an offer is accepted as offered and the acceptance is communicated. The parties must also have authority, and a company's contract must be signed by someone authorized to bind it. Special roofing situations:
- In-home sales. Under the Home Solicitation Sales Act, the buyer may cancel until midnight of the third business day after signing (Section 3.4). The contract is not firm until that period passes.
- Joint owners. Under the Construction Lien Act, a co-owner is presumed to have consented to an improvement contracted by another co-owner (MCL 570.1107(5)). Having all titled owners sign still avoids disputes.
- Proposal expiration. A proposal that says "valid 30 days" lapses after 30 days, and the price must be renewed.
- Unlicensed status. Signing while unlicensed means the contractor cannot sue to collect or claim a lien (MCL 339.2412).
- Credit secured by the home. If contractor-arranged financing takes a security interest in the owner's principal dwelling, federal Truth in Lending rules generally give a 3-business-day right to rescind.
A Quick Example
A roofer bids $12,800 lump sum, plus $85 per sheet of replacement OSB. The homeowner writes back, "Accepted at $12,000." That is a counteroffer, and no contract exists yet. If the roofer agrees in writing to $12,000, both parties sign, the licensing statement and license number appear, and a copy is delivered, the contract satisfies R 338.1533 and MCL 570.1114.
A homeowner replies to a roofer's $15,000 proposal with, "We accept if you include new gutters at no extra cost." What is the legal effect?
A binding contract at $15,000 with gutters included
A binding contract at $15,000 without gutters
An acceptance that the roofer must honor within 30 days
A counteroffer that rejects the original proposal and forms no contract until the roofer accepts it
Which contract type places the most cost risk on the roofing contractor?
Lump-sum (fixed-price) contract
Cost-plus-percentage contract
Time-and-materials contract without a cap
Cost-plus-fixed-fee contract
Under R 338.1533, what must a licensee's written agreement with a customer clearly state?
Only the total price and the start date
Only the scope of work, because materials are chosen later
The terms, including specifications, cost, the type and amount of work, and the type and quality of materials
The contractor's insurance limits and bonding capacity
Sections you finish are checked off in the contents.