Tuesday, March 31, 2009

A New Dawn for Georgia Contractors: Warranty

Not many residential contractors in Georgia are good at writing warranties for their work. Builders usually think of warranties as bad news: Nothing good ever came from a warranty. Better to ignore the issue and hope clients never give it a thought.

That's about to change. Georgia Code Section 43-41-7 (the Written Warranty Act) now requires that residential contractors deliver a written warranty before starting work on any job valued at over $2,500 (see footnote 1). The Georgia legislature left it to the State Licensing Board for Residential and General Contractors to decide what has to be in that warranty. The Board's regulation (see footnote 2) went into effect on August 4, 2008.

There are two ways to look at this. First, the Written Warranty Act is just another burden contractors have to carry (or find a way to avoid). Second, you could decide that the Written Warranty Act is an opportunity likely to make or save you time and money. I think it's the latter and will explain why.

When you buy a car or a set of tires or get your car serviced, you get a warranty as part of the deal. That warranty draws a line in the sand – identifying exactly what's covered and what isn't, reducing the margin for dispute. Car dealers and appliance manufacturers wouldn't even consider doing business without a written warranty – for their own protection. Licensed residential contractors need warranty protection even more than appliance dealers. Your risk of loss is greater. A good contract with favorable warranty terms will lay off that risk.

And the Written Warranty Act makes it easy. The only iron-clad warranty rules: (1) It has to be in writing. (2) Has to explain what's covered and what's excluded. (3) Has to identify duration of the warranty. (4) Has to describe claim procedures and (5) response options. (6) And has to assign any manufacturer warranties. What your warranty says on those six points is entirely your call. Nothing in Section 553-7-.01 ties your hands. You can cover or exclude anything and for any period so long as you touch all six bases.

There's a certain symmetry to this new law. For several years, Georgia's Right to Repair Act (see footnote 3) has protected residential contractors from suit over claimed construction defects. Before filing suit, the home owner has to work through a 90-day settlement procedure. To get that protection, all you need do is insert a one-paragraph notice in the construction contract.

So now the scales are in balance: Obligations of the homeowner under the Right to Repair Act weigh against obligations of the contractor under the Written Warranty Act. In a way, it makes perfect sense.

If you need help drafting warranties for your jobs, the Web site Construction-Contract.net has a good selection of sample contracts for residential work, each with a warranty and Right to Repair notice that comply with Georgia law.

The download is free and available in PDF (Adobe Acrobat), RTF (MS Word or WordPad) and CCF (Construction Contract Writer) formats.

1 Official Code of Georgia Annotated 43-41-7. Written warranties required
A licensed residential contractor and any affiliated entities shall offer a written warranty in connection with each contract to construct, or superintend or manage the construction of, any single family residence where the total value of the work or activity or the compensation to be received by the contractor for such activity or work exceeds $2,500.00. The residential contractor division shall establish the minimum requirements of such warranty. The parties to the warranty may agree to submit any or all disputes arising under the warranty to arbitration. Such agreement to arbitrate shall be enforceable as provided in Part 1 of Article 1 of Chapter 9 of Title 9, the "Georgia Arbitration Code."

2 Compiled Rules and Regulations of the State of Georgia Section 553-7-.01 Written Warranty.
(1) Definitions:
(a) “Covered contract” shall mean any contract to construct, or superintend or manage the construction of, any single family residence where the total value of the work or activity or the compensation to be received by the contractor for such activity or work exceeds $2,500.00.
(b) “Single family residence” shall be deemed and construed to mean a “one or two family residence” as defined in the current edition of the state minimum standard International Residential Code (IRC).
(2) A licensed residential contractor and any affiliated entities shall offer a written warranty in connection with each covered contract.
(3) A licensed residential contractor that enters into a covered contract shall provide a written warranty which describes, at a minimum:
(a) Covered work and activities;
(b) Covered exclusions;
(c) Standards for evaluating work and activities, which standards shall be those set forth in the current edition of the Residential Construction Performance Guidelines as published by the National Association of Home Builders;
(d) The term of the warranty, including commencement date(s) or event(s);
(e) Claim procedures;
(f) Contractor response options (such as repair, replace or compensate);
(g) Assignable manufacturer warranties.
(4) Prior to the execution of a covered contract, a licensed residential contractor shall attach a complete copy of the written warranty (or an identical blank standard form of it) to the covered contract or otherwise make same available for review.

3 Official Code of Georgia Annotated Sections 8-2-35 to 8-2-41

Thursday, March 19, 2009

Illinois Home Repair and Remodeling Act

Cory and Angela Bogard needed more space in their Casey, Illinois home. In the fall of 2004, Dan Smith of Dan R. Smith Building Services offered to put a 26' x 20' addition on the Bogards' living-room for "$20,000 or less". Cory and Angela accepted Dan's offer and he started work the following month. By February, Dan had pocketed $15,000 in progress payments and was nearly done. His final bill was $10,515, bringing the total cost of the job to $25,515. That was a little over budget. But at $49 per square foot, Cory and Angela got a pretty good deal. Unfortunately for Dan, that wasn't the end of it.

The Bogards weren't satisfied. They refused to pay, claiming more work was needed. Dan didn't agree. Months passed. It was too late for Dan to file a mechanics' lien. By October, Dan still didn't have his $10,515. So he filed suit.

Dan's fate was now on the desk of two Illinois attorneys, both looking for ways to blast the other side.

The Bogard's attorney had high caliber ammunition, courtesy of the lawmakers in Springfield. The labels were HRRA, CFA and HRFA. If you make a living in residential construction in Illinois, you need to know these acronyms:

HRRA -- Home Repair and Remodeling Act
CFA -- Consumer Fraud and Deceptive Business Practices Act
HRFA -- Home Repair Fraud Act

HRRA requires a written contract for just about every residential remodeling or repair job over $1,000. The builder and the homeowner have to sign and date the contract and a brochure, 'Home Repair, Know Your Consumer Rights'. That was Dan's problem. No contract, no brochure and no way to collect. The court didn't award Dan a dime for his trouble, leaving him $10,515 short on the Bogard job. But it could have been worse, as I'll explain.

The enforcement teeth for HRRA are in Illinois' Consumer Fraud and Deceptive Business Practices Act (CFA). Operating a home improvement business under an assumed name can earn a $2,500 fine and a year in prison. Dan had no problem there. He was doing business under his own name, Dan R. Smith Building Services. But failure to complete work on time gives owners the right under CFA to demand a full refund. What if the Bogards had demanded a refund a week or two after Dan pulled off the job? Under CFA, Dan would have had 10 days to return the $15,000 in progress payments to that point. The penalty under CFA for failure to make a full refund: Suspension of the right to do business and a fine of up to $50,000.

Illinois' Home Repair Fraud Act (HRFA) threatens contractors with up to a year in jail and a $2,500 fine for making false promises, misrepresenting a material fact about the job, charging more than four times fair market value for any work, making false excuses for non-performance, failing to employ qualified personnel or violating the building code. Wow!

But, as I said, Dan got off easy. He got tripped up by HRRA and lost ten grand. A mistake under CFA can be (much) more expensive. Consider the case of Joe and Chris Taylor. They agreed to pay Father and Sons Inc. $40,000 for an addition to their home in LaGrange Highlands. The job went bad and ended up in arbitration. On a $40,000 job, the Taylors got an award under CFA of $40,000 for design defects, $22,006 for consultants, $75,000 for attorney fees, $1,400 for arbitration expenses and a discharge of all mechanics liens filed by Father and Sons Inc.

The moral of these stories: When a job goes bad, your paperwork better be good. If it isn't, you've written a blank check that's going to be cashed by an attorney for the other side.

Do yourself (and your bank account) a favor. Push back against consumer protection laws that back contractors into a corner. You're liable for everything that's either in or omitted from your contracts. Why not draft agreements that bend the bias in your favor? There's nothing illegal about that.

If your client suggests using an A.I.A. form or some other boilerplate contract, explain that the document offered is unlawful for home improvement work in Illinois. Using an unlawful contract would be a deceptive act under HRRA and CFA and could land you in jail. Instead, offer an agreement that you drafted and that complies with Illinois law.

The Web site http://construction-contract.net/list.php?state=IL has a good selection of Illinois contracts that favor Illinois contractors. The download is free and available in PDF (Adobe Acrobat), RTF (MS Word or WordPad), and CCF (Construction Contract Writer) formats.

If you make a living as an Illinois contractor, have a look at this site.

Sunday, March 15, 2009

Pennsylvania's Home Improvement Consumer Protection Act

Pennsylvania has joined New York, Illinois, New Jersey, Texas, Florida, California and other states in micro-managing construction contracts for home improvement work. Pennsylvania's Home Improvement Consumer Protection Act (HICPA) is intended to protect owners when negotiating home improvement jobs. But HICPA's list of contract requirements is like a ridge board made from utility grade lumber: long but with plenty of loopholes. It's easy to move contract bias back to favor home improvement contractors. That's the subject of this blog.

HICPA (effective July 1, 2009) requires a written contract for nearly every construction task in or around a residence -- even minor repair work such as re-painting or re-roofing. If the value of work is more than $500 and if you expect to get paid, you need a written contract.

The agreement has to include all the usual facts plus a few you wouldn't expect to see in a construction contract:
The attorney general's phone number -- 800-441-2555,
The contractor's street address -- not a P.O. Box,
Specific start and completion dates,
A description of the materials to be used and a set of specifications,
The contractor's property damage and liability insurance limits ($50,000 minimum),
A list of subcontractors, each with a phone number and street address (no P.O. Box).

If disputes are to be settled by arbitration, the arbitration clause has to be in 12-point bold caps and must specify (1) whether documents will be confidential and (2) whether the arbitrator's decision is final.

If the contract price exceeds $1,000, the down payment can't exceed 1/3 of the total price plus the cost of any special order materials – which have to be listed in the contract.

Time and material contracts (cost-plus agreements) are unlawful under HICPA because the contract has to show a contract price, not an hourly rate.

HICPA makes the entire contract unenforceable by the contractor if any of ten (formerly) common clauses appear in the document. The poisonous ten include hold harmless clauses and terms that award attorney fees to the contractor.

Using a contract that doesn't comply with HICPA is an "unfair or deceptive act or practice" under Pennsylvania's Unfair Trade Practices and Consumer Protection Law. Even a trivial omission gives an owner the right to seek triple damages plus costs and attorney fees. If you have to threaten suit or arbitration to collect, the owner's attorney is sure to scour every word in your contract looking for anything that doesn't comply with HICPA.

Obviously: Contractors beware!

But don't hang up your tool belt just yet. Home improvement contracting in Pennsylvania doesn't have to be a minefield for the unwary. There are still good ways to limit risk and control the outcome of your jobs.

First, understand that HICPA gives contractors a leg up in the negotiating process. If your client suggests using an A.I.A. form or some other boilerplate contract, explain that the document offered is unlawful for home improvement work in Pennsylvania. Using an unlawful contract would be an unfair or deceptive act or practice. Instead, offer a form that complies fully with Pennsylvania law. This is important: HICPA holds the contractor liable for non-compliance, no matter who actually drafted the agreement. Don't disappoint the lawmakers in Harrisburg. Write the contract for every one of your home improvement jobs.

Next, take full advantage of loopholes in HICPA. Here are seven good ways to tip contract bias back in your favor.

Collect for changes in the work. Changes are almost inevitable in construction. Most boilerplate construction contracts require that changes be done on a time and material basis -- usually with little or no markup. That doesn't work any more. HICPA makes cost-plus home improvement contracts an unfair or deceptive act or practice. Now, changes require mutual agreement and a signed change order. Every contractor knows what that means. Contract negotiation starts again any time an owner or the inspector wants a change in the scope of work. Both required changes and discretionary changes should be done on your schedule and at your price.

My advice: It's a "prohibited act" under HICPA Section 9 to agree to any material change without a written contract modification. So when you get a request for changes, fire up your contract-writing software. Write a new contract covering just the change the owner wants – and at exactly the price you want to charge.

Let your estimate define the job. When you bid the plans and specs, you're agreeing to complete work as defined in those plans and specs – even if your estimate omits something essential to the job. Bidding the plans is routine on the largest construction projects. PennDOT won't even look at a contractor's estimate. But it doesn't have to be that way. Contractors take unnecessary risk when they guarantee completion as planned, no matter what's in the estimate.

Here's a safer protocol: The contract price should cover only what's in your estimate. Anything omitted from your estimate isn't part of the job. For example, don't agree to install "a new shingle roof and replace deteriorated flashing." That turns your contracting business into an insurance company. All mistakes and surprises come out of your pocket. Instead, let details in your estimate define the job. Suppose your estimate (proposal) shows 2,000 SF of shingles and 100 LF of flashing. If more material is needed, there will be an extra charge. That's completely fair and perfectly legal under HICPA. How can you make the estimate define the work? Easy: Simply identify the estimate as part of the contract and add a few words, "The estimate defines the work required, no matter what appears in the plans and specs."

Control the payment schedule. HICPA limits the down payment to 1/3 of the contract price on jobs of $1,000 or more. But HICPA says nothing about progress payments. You're free to draw up a front-loaded progress payment schedule that keeps receipts well ahead of expenses.

Collect attorney fees if suit or arbitration is required. HICPA Section 7(e)(8) makes any contract totally unenforceable against the owner if "the contractor shall be awarded attorney fees and costs." Interpreting those words strictly, HICPA doesn't void a contract clause which awards attorney fees to "the prevailing party." That seems OK under HICPA, even if the contractor is the prevailing party. This is an important distinction.

The possibility of an award of attorney fees is a heavy incentive to settle most disputes. With no risk of being charged attorney fees, and with a chance of collecting attorney fees under the Unfair Trade Practice Act, a devious owner could threaten to litigate even the smallest issues. Eventually, Pennsylvania courts will resolve the issue: Can HICPA contracts include an award of attorney fees to the prevailing party? Until that happens, what should your contracts say? Remember, attorney fees are one of HICPA's ten poisonous clauses.

I believe courts will come down on the side of contractors this time, and for a very practical reason. Courts are too congested already. The threat of an award of attorney fees keeps most disputes out of court – freeing up court calendars for more productive work.

Make the owner liable for surprises on the job. Until you open up a wall, there's no way to be sure what's in a wall cavity. Nearly all surprises on a home improvement job will increase costs. Almost none will reduce costs. So it's prudent to include a "differing site conditions" clause in every one of your contracts. Nothing in HICPA requires that contractors absorb the loss when something doesn't go as planned.

Nearly all contracts for large construction projects include a differing site conditions clause. The U.S. version is Federal Acquisition Regulation Section 52.236-2. If it turns out that something isn't what the owner represented or what the contractor could reasonably expect, a differing site conditions clause provides extra pay for extra work. Both the owner and contractor benefit from a differing site conditions clause. The owner gets a bid based on what can be reasonably expected, not the worst case. The contractor is protected if costs escalate due to surprises.

Make the owner liable for delay. HICPA Section 8(a)(2) classifies failure to complete work on time as "home improvement fraud" if the contractor doesn't comply with a demand for a refund. On contracts for $2,000 or less, failure to complete work on time is a first degree misdemeanor (five years in jail). Contracts over $2,000 earn a charge as a third degree felony (seven years).

I don't believe the legislature's plan is to populate Rockview State Prison with tardy home improvement contractors. But I know it's easy to avoid these penalties. Simply include plenty of protection in your contract. HICPA doesn't define excusable delay. So define excusable delay very broadly. Then incorporate a "worst case" construction schedule in your contract. That takes the pressure off.

Be aware that there's a bigger issue lurking here. HICPA comes down hard on contractors who have trouble staying on schedule. Fine. But what about homeowners who delay the job or who don't make payments on time? Turnabout is fair play, in my opinion. Nothing in HICPA restricts charging the owner for delay. Pennsylvania courts routinely enforce contract clauses which make the owner liable for delay of the work. Your contracts should support delay claims.

Limit warranty claims. HICPA is also silent on warranties. That means you're free to follow your conscience when drafting home improvement contracts. Pennsylvania courts imply warranties of habitability and good construction. But your contract can limit the scope or duration of warranty or disclaim those warranties entirely. You'll need help drafting a disclaimer of warranty or putting limits on warranty claims.

The site PennsylvaniaConstructionContract.com has a good tool for drafting HICPA-compliant contracts with bias favoring contractors in all seven of the categories mentioned.