Saturday, December 31, 2011

Why Contractors Like ADR

Construction disputes usually start with a surprise – something nobody considered. A good contract anticipates the most likely surprises. But no contract is perfect. Occasionally you’re going to have a dispute.


If you write the contract, you decide how disputes will be settled – either in court or by arbitration. If your contract requires arbitration, usually called alternative dispute resolution or ADR, the arbitrator’s decision will be final. There’s no right to sue. That can be an advantage. Arbitration is usually faster and cheaper than litigation. Many arbitration cases are decided on written statements alone. Statistics show that merchants usually win and property owners usually lose in arbitration. That makes arbitration a good choice for construction contractors. An arbitration clause in your contract adds leverage when an owner (or the owner’s attorney) threatens to sue.

But There’s a Problem.
Eleven states void any arbitration agreement in a residential construction contract that omits disclosures required by state law:
  • California -- Business & Professions Code § 719
  • Illinois – Title 815 Illinois Compiled Statutes § 513/15.1
  • Maryland -- Code of Maryland Regulations § 09.08.01.25.
  • Massachusetts -- General Laws 142A, § 4.
  • Missouri -- Revised Statutes § 435.460
  • Nebraska -- Revised Statutes § 25-2602.02.
  • Oregon -- Administrative Rules § 812-012-0110-1-f.
  • Pennsylvania – Title 73 Pennsylvania Statutes Section 517.7
  • South Carolina -- Code Annotated § 15-48-10(a).
  • Texas -- Property Code § 420.003.
  • Vermont -- Title 12 Vermont Statutes Annotated § 5652
The disclosure statement required is different in every state: the exact words, all upper case, underlined, signed or above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to be enforced. That’s a trap for the unwary. Don’t get caught.

What’s in an Arbitration Clause?
No state or federal court will touch a dispute about a contract that includes an arbitration clause – an agreement to settle disputes using private ADR rather than public courts. Your arbitration clause should identify who will do the arbitration (such as the American Arbitration Association or Construction Dispute Resolution Service) and the arbitration rules that apply.

Federal law and policy favor arbitration. State limits and restrictions on arbitration, such as in the eleven states listed above, have been invalidated when the subject of the contract included interstate commerce. And nearly all construction includes materials from out of state. Still, the easiest and cheapest way to get into arbitration (and stay out of court), is to comply with your state law.

Construction Contract Writer makes that easy. If your preference is arbitration and if you do work in one of the eleven states listed above, get the trial download. It’s free.

Monday, November 28, 2011

Insurance Repair Work in Illinois

Starting January 1, 2012, residential contractors in Illinois have to jump through another hoop.

If any part of a job may be covered by insurance proceeds, section 513/18 of Illinois’ Home Repair and Remodeling Act will require a special notice in the contract and extra cancellation forms. Section 513/18 applies if:
  • The work is on an existing residential building with from one to six units, and
  • The work is valued at $1,000 or more, and
  • Repairs are needed because of damage from a “natural occurrence” and
  • More than one residence was damaged by this natural occurrence, and
  • Part of the work may be covered by proceeds from property insurance.
If § 513/18 applies, a contractor:
  1. Can’t offer a discount on the insurance work.
  2. Can’t help the homeowner file an insurance claim.
  3. Has to include a roofing contractor’s license number in the contract.
  4. Can’t start work until the insurance claim is resolved.
This doesn’t make sense on several levels:
  1. Contractors should be encouraged to give discounts.
  2. Some homeowners need help preparing claim forms.
  3. Not all catastrophe repairs require a roofer.
  4. Homeowners need the right to start repair work before their claim is settled.
Ready, Fire, Aim
Illinois has a reputation for legislating first and regretting it later. Until the Home Repair and Remodeling Act was “fixed” last year, a violation of the law left contractors with no right to collect. For example, in Smith v. Bogard, a contractor who forgot to give an owner the state’s two-page consumer protection brochure lost all rights: The contract was unenforceable, lien rights were void and there was no recovery for unjust enrichment. That opened the door to all kinds of mischief by owners operating in bad faith. The Illinois State Bar, the office of the Illinois Attorney General and the legislature in Springfield stewed about that for a while and decided that wasn’t what they intended. So HRRA was “fixed” last July, allowing enforcement of lien rights and recovery for unjust enrichment.

Now comes the new section 513/18. Sub-section (f) requires a boldface notice in the contract. Sub-section (g) requires a new cancellation form – in duplicate – attached to the contract. This is in addition to the usual Reg. Z (three-day) cancellation form. I have no problem with either the notice or the attachments. Contractors know their contracts have to be letter-perfect. But there will be unintended consequences from sub-section (e). An owner has the right to cancel the contract at any time up to the earlier of:
  • Five days after the insurer has denied any part of the claim, or
  • Thirty days after the homeowner has delivered a proper proof of loss to the insurance carrier.
After cancellation, the contractor has ten days to make a full refund – even if repairs are already complete!

So what’s an insurance repair contractor supposed to do? I have three recommendations:
  1. Write the contract now. But don’t start work until the insurance claim is settled.
  2. If only part of a job is covered by insurance, put that part on a separate contract. Write another contract for the remainder of the job. Start work on the non-insurance work when you’re ready.
  3. Explain section 513/18 to the owner. Until the carrier settles, your hands are tied. All you can do is prevent further damage – but only if the owner agrees in writing.
As long as there’s a right to cancel, repairs are on hold. That benefits no one. Better to let an owner acknowledge in the contract that their insurance claim may be denied. Then get on with the work. A “fix” like that benefits everyone. But until the legislators in Springfield make that change, Illinois contractors have to follow the law as written.

If you’re using Construction Contract Writer, your program will revise automatically when the new Illinois law goes into effect. If you’re not using Construction Contract Writer, the trial version is free.

Monday, October 24, 2011

A.I.A. Contracts vs. ConsensusDOCS

In April 2009, Bennett Builders signed a contract to remodel the Stamford, CT home of Tarun Mehta. It was a cost plus job at a price not to exceed $446,900. Under the agreement, work was to be completed by October 2009. Over a year later, work still wasn’t done and Mehta terminated the agreement. Bennett filed suit for $31,754.94 still due on the contract and asked the court for a pre-judgment remedy, an attachment of $32,000 on Mehta’s home.

This should have been a good job for Bennett Builders. They stood to earn a fee of $31,500. Even if the court denied payment in full under terms of the contract, Bennett should have been able to collect for the value of materials and labor that went into the job. Unfortunately, it didn’t work out that way. Bennett had made a serious mistake, using an A.I.A. contract.

The 17-page contract Bennett and Mehta signed was essentially the American Institute of Architects ("AIA") Document A107-1997 "Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of a Limited Scope Where the Basis of Payment is a Stipulated Sum." Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble. That’s exactly what happened to Bennett Builders.

On September 23, 2011, the Connecticut Superior Court denied Bennett Builders any relief – nothing under the terms of the contract and nothing for the value of goods and services that went into Mehta’s home. Why? The law is clear. Connecticut’s Home Improvement Act and Connecticut’s Home Solicitation Sales Act require a notice of cancellation in at least 10 point bold type. The A.I.A. contract doesn’t comply with Connecticut law and won’t be enforced by Connecticut courts. You can read the case at 2011 Conn. Super. LEXIS 2481.

I’m often asked to make a recommendation. Which is better for builders, A.I.A. contracts or ConsensusDOCS? I can’t recommend either. Neither includes the notices and disclosures every state requires in construction contracts. These notices vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. To see the construction contract notices and disclosures required in your state, go to Construction-Contract.net and click on your state.

To avoid sharing the fate of Bennett Builders, take a look at Construction Contract Writer. The trial download is free – and complies precisely with both federal law and the law of your state.

Sunday, September 18, 2011

Truth-in-Lending for Contractors

Most contractors don’t get into the money-lending business – at least not on purpose. Contractors want to be paid in full when the work is done. But at least occasionally, you’re going to bump into the Federal Truth-in-Lending (T-I-L) Act.  Here’s how it happens:

You’re bidding a job for a homeowner and:
  • Offer to take an IOU for part of the job, OR
  • Agree to stretch out payments after work is done, OR
  • Recommend a lender.
On purpose or by accident, that puts your bid under the T-I-L Act. Fail to make the required disclosures and you’re liable for both the overcharges and your client’s attorney fees. That’s not what any contractor wants.

Offering credit is powerful stuff. It can help close any deal. Everyone knows that. And it’s just as true for construction work as it is for any major purchase. Banks, finance companies and car dealers are good at T-I-L compliance. That’s their business. You’ve seen the pages of fine print. If you want to offer credit as part of your proposal, here’s what T-I-L requires:
  • The name of the creditor.
  • The cash price if paid on completion.
  • The down payment and all other payments prior to completion.
  • Any other charges, fees, credits or deductions.
  • The interest rate on the amount financed.
  • The amount financed.
  • The finance charge in dollars.
  • The annual percentage rate (APR) used to figure the finance charge.
  • The number of payments.
  • The amount of each payment.
  • The due date for each payment.
  • The total of all payments.
  • The total sale price including the finance charge.
  • The charge for late payments.
  • The pre-computed finance charge, if any.
  • Whether there is a prepayment penalty.
  • Whether the loan is assumable.
  • What secures the loan.
  • When the finance charge begins to accrue.
Note that these disclosures have to be in the construction contract any time you recommend a lender – even if T-I-L disclosures are also in the note prepared by the lender.

Most contractors aren’t eager to deal with this level of detail. You’re well advised to get help the first time you venture into T-I-L territory. One good source: Construction Contract Writer does all the work for you – figuring the APR and making all required disclosures right in the construction contract.

Thursday, August 25, 2011

Contracts for Insurance Restoration

Last week I had a chance to interview Paul Bianchina, author of the new book, Insurance Restoration Contracting. Excerpts from that interview:

Moselle: What's different about insurance repair contracts?

Bianchina: Insurance carriers expect nothing but professionalism from their contractors. If you want to do insurance work, plan to comply with every local, state, and federal law. Insurance policies comply with the law. Insurance carriers expect restoration contracts that are just as good.

Moselle: Restoration contractors work for the property owner, not the insurance company. Is the insurance company involved with the contract at all?

Bianchina: Not directly, but just about everything the restoration contractor does reflects back on the insurance company.  So the contractor - and the contract - has to solve problems, not create them.

Moselle: Any other differences in insurance work?

Bianchina: Sure. Insurance restoration is complex. Nearly everything should be in writing.

Moselle: You better explain that.

Bianchina: For one thing, insurance companies initially want bids for just the visible damage. Supplemental damage estimates may come later, after work starts. Every change in the scope of work requires a contract change. If you expect to get paid for supplemental work, you better document every change and get a signature.

Another difference: Insurance losses create opportunities for an owner - a chance to make improvements. Nothing wrong with that. But insurance carriers won't pay for "betterment." So you have to break out covered losses from what gets done on the owner's dime. Done right, these changes are good work for a restoration contractor. Done wrong, you're in a dispute or worse. Documentation is the key. Separate everything that's insurance-related from what's done at the owner's request. Good documentation guarantees payment.

Moselle: Insurance restoration jobs have a higher profile than other types of work. Any thoughts on that?

Bianchina: True. You have the homeowner watching, the insurance company watching - sometimes more than one insurance company.  City and county officials tend to keep a close eye on fire loss jobs.  If the site of the loss is a crime scene, law enforcement personnel will be involved.

Everyone has their own interest to protect. Everyone can hire their own lawyer: the insurance company, the real estate company, the driver who hit the house, the owner, the city, the building department. When lawyers get involved, you better have the best possible notes and paperwork - including your contract.

Another caution: Many states now require that a seller disclose any significant damage to a home. If there's been a fire or water loss or mold remediation on site, that has to be disclosed at the time of sale.  As a restoration contractor, expect to be asked about repair work you've done. And plan to show that all work was done by the book.

Moselle: What else can go wrong?

Bianchina: Owners don't always play by the rules. Some can't resist temptation when the settlement check arrives. Again, a legally enforceable contract can save the day.

Moselle: Any more advice for restoration contractors?

Bianchina: Don't think of yourself as just a guy who's banging nails. Never lose sight of who you are.  You're called a contractor for a reason.  Don't start any job without a legally enforceable contract. In my opinion, anyone doing work on a handshake - or even a two-page boilerplate contract form - is simply asking for trouble.

Moselle: Good advice, Paul. Thanks.

Click here to have a look at the best construction contract drafting tool available on the Web.

Sunday, July 10, 2011

Changes in Construction Contract Law

Every state sets standards for construction contacts. For residential work, most states require very specific notices and disclosures. Heavy penalties apply to contractors who ignore these requirements. Click here and then click on your state to see what the law in your state requires.

Contract requirements in your state depend on the type of job (residential or commercial), the value of the job, where the contract is signed and whether it’s a prime contract or a subcontract. Even experienced contractors can make a mistake – especially when laws change. And change happens often, as the list below demonstrates.

In the last few months, 22 states have made at least minor changes in construction contract law. Here are the highlights:

Arkansas Nearly all arbitration agreements are now valid. Arkansas Code Annotated § 16-108-206. The maximum interest rate is no longer limited to 5% above the Federal Reserve Discount Rate. Arkansas Constitution, Article 19 § 13(a).

California The insurance disclosure required for home improvement work has changed. California Business and Professions Code § 7159. The mechanics’ lien warning required on residential jobs will change on July 1, 2012. California Business and Professions Code § 7164

Illinois The definition of aggravated home repair fraud includes an act against anyone age 60 or more. 815 Illinois Compiled Statutes § 515/5.

Mississippi Contracts for residential work must disclose (in bold type) the contractor’s general liability insurance coverage. Code of Mississippi Rules § 50-023-002.

Minnesota Contracts for residential construction must include written performance guidelines. Minnesota Statutes § 327A.03.

Oklahoma Effective 11/1/11, retainage on public works jobs is limited to 5%. Oklahoma Statutes Title 61 § 113.1 Roofing contracts must now show the contractor’s registration number. Oklahoma Statutes Title 59 § 1151.17C

Oregon Retainage on private jobs can’t exceed 5% even if there is no completion bond. Oregon Revised Statutes § 701.420(1)

Washington Retainage on public improvement projects can’t exceed 5%. Revised Code of Washington § 60.28.011. No matter what the contract says, failure of an owner to reveal a known underground obstruction makes an owner liable for the extra cost, damages and attorney fees. Revised Code of Washington Section 19.122.040. [Effective January 2013]

If you use Construction ContractWriter, your program updates automatically to comply with these revisions in the law. Others would be well-advised to check their contracts for compliance.

Sunday, June 19, 2011

Tips for Solar Contractors

Most of solar installation contracts I've seen are pretty weak. They don’t cover the essentials and won’t hold up in court. Here’s why.

Solar installation is construction contracting. No state exempts solar work from compliance with construction contract law. From what I’ve seen, solar contractors don’t understand that yet. Whether structured as a lease, a power purchase agreement or outright sale, every solar installation contract needs the same notices and disclosures required for a residential remodeling contract. That’s black letter law. Heavy penalties await a solar contractor who uses a defective contract.

But solar contracts have to be different. Conventional construction is sold with a cost estimate. Solar jobs are sold on a forecast of cost savings. Solar contractors use Web tools to work up the savings forecast:
Clean Power Finance Tools
Energy Guide
Energy Periscope
OnGrid Solar
Quick Quotes for Clean Energy Systems
PolySun
PVWatts
Valentin Software

Just plug in the numbers to get a persuasive sales packet – usually with cost savings in the thousands. Then total the financial incentives, rebates and credits listed for your community at http://www.dsireusa.org/. Most likely, your client will be a good candidate for solar.

What comes next is harder: The installation contract. Why? Because with solar, the cart goes before the horse. You start with a signed contract based on the forecast of savings. Then you draw plans and do the engineering.

Why get a signed contract before plans are final? That’s easy. Putting the job together takes time and costs money: approvals and commitments (utility company, HOA, building department), engineering and a site audit. Don’t start planning a job without a signed contract and a deposit.

As I said, solar installation contracts are different. I’ll tick off the essentials.

Nail down the assumed power savings. Every solar job starts with estimated savings. Suggest that savings will be X+Y and actually deliver savings of X alone and you’re in trouble – even if the contract doesn’t include a guarantee. (More on guarantees later).

Your forecast of power generated by a photovoltaic (PV) system is pure solar engineering. Enter the numbers accurately in any of the financial modeling programs linked above and you’ll get a good power forecast. But to forecast cost savings, you need an estimate of power consumption. Pick one of four ways, listed here in order of decreasing reliability:

  • The annual average of 3 years of actual power used as reported on utility statements.
  • One year of actual power used as reported on utility statements.
  • The square feet of living area multiplied by published averages (such as by the EIA).
  • A guestimate of the annual power cost divided by the average cost of electricity.
Your contract should identify which method was used in the forecast. It’s OK to be way off in a power consumption estimate – so long as your contract is clear that the forecast was based on figures supplied by the property owner.

To protect yourself, reference the forecast of power savings in your contract. Leave no doubt about how you estimated the savings.

Exactly what gets installed? Conventional construction contracts reference a set of plans and specs. But with solar, the cart goes before the horse. Eventually there will be working drawings and specs for a solar job. But that’s not going to happen before you ask for a signature on the contract. So your contract has to list what gets installed. Fortunately, that’s a short list:
  • Number of panels
  • Panel manufacturer and model
  • Number of inverters
  • Inverter manufacturer and model
  • Manufacturer of the mounting system
  • Vendor of the monitoring system
That’s about all you need to bid the job. If something changes later, such as in engineering or during the site audit, be sure there’s a contract clause that covers substitutions. More on that later.

Cover solar incentives and permits. Incentives, credits and rebates all belong to the owner. Your forecast of cost savings should pile these on as deep as the law allows. But cover two points in your contract.

  1. Solar incentives change and expire. Don’t guarantee any specific credit or rebate. Your client should have the right to cancel if incentives evaporate. That right should expire once the permit is issued.
  2. You need the right to apply for incentives, rebates and credits in the name of the owner. Cashing in on these incentives takes time and persistence. Don’t depend on the property owner to get it right. The same is true for permits and approvals, such as from an HOA or a utility company.
Cover interconnection issues. You’ll do the actual connection. The utility company will retain ownership of lines connecting your solar equipment to the power grid – and will probably want a utility easement so they can service installed equipment.

What about the service entrance panel? This is where even experienced solar contractors stumble. The existing breaker box is always a question mark when planning a solar job. Either it needs major work or it doesn’t. Replacing the existing box can add $2,000 to the cost of a residential solar project. An electrical engineer, the utility company and maybe the building inspector will make the decision later. So your contact has to cover the contingencies. Either:
  1. You’re sure the existing panel is OK. The contract price doesn’t include anything for work on panel, or
  2. You expect the panel will need work but haven’t included that cost in the contract, or
  3. The panel will have to be replaced and the contract includes an allowance to cover the cost.
There will be changes. Contracts for solar energy projects are signed before the site audit and final engineering. Occasionally, the need for a change in the contract will become obvious – either in selections of materials or in project design. For example, panel specs and availability can change. Make sure your contract explains how to handle changes.

Be specific on project closeout. Work is complete when you pass final inspection. A green tag from the inspector means the system can start delivering power. Commissioning by the utility company qualifies your client for incentives. But the utility company may not be in any hurry to schedule the commission test. Months may pass. The contract should be clear: Final payment is due when you can show power production as predicted in the forecast of savings, not when the utility company commissions the project.

Offer to maintain the system. Every solar energy system requires maintenance. That raises two contract issues. First, it’s an opening to offer a service contract. Quote a price for annual maintenance right in the installation contract. Describe what’s covered and what isn’t. Second, disclaim liability for system performance if maintenance isn’t done annually by qualified personnel.

 Guarantee the solar savings. Your forecast of savings made the job possible. Why not put your money where your mouth is? Guarantee those savings. That’s common on commercial solar jobs. It works just as well on residential jobs. There’s little risk if the guarantee is written correctly.

Remember, I said that production of a PV system is pure solar engineering – very predictable unless there’s a train wreck. Exclude responsibility for train wrecks and there’s little risk you’ll have to cover a shortfall.

Guaranteed savings will be very persuasive when it’s time to sign the contract. Even better, a guarantee creates extra solar business: maintenance and monitoring. Make the guarantee contingent on annual maintenance and monitoring by your company. Monitoring is automatic by wired or wireless connection between the inverter and the owner’s router or access point. That’s something else to cover in your contract. Revenue-grade monitoring will be required for net metering – the electric meter turns backward.

What about a warranty? The contracts I’ve reviewed try to dance around the issue, passing on the manufacturer’s warranty and disclaiming everything else. That’s clever. But it doesn’t cut the mustard in most states. In Kansas, for example, it qualifies the contractor for a $10,000 fine. Remember, residential solar jobs are residential construction. The warranty in a solar contract has to comply with state law, just like everything else in a solar contract.

For info on solar installation contracts that comply with the law in your state and touch all the bases, have a look at Construction Contract Writer.

But don’t let me discourage you. Solar installation contracting can be good business. Solar is growing. It’s easy to understand why. A Federal tax credit covers 30% of your client’s cost. Rebates, incentives, lease deals and power purchase agreements can reduce up-front cost to near zero. And the cost of solar arrays drops 10% nearly every year. With benefits like that, many contractors should think solar.

Saturday, May 7, 2011

Getting Technical in Connecticut

In spring of 2007 William and Kristen Bachman decided to remodel their home in North Haven, CT. East Coast Custom Builders got the job for $77,244.50, including a $25,748 deposit. But when East Coast came by the Bachmans’ home to get a signature on the contract, there was a problem. Kristen didn’t have the $25 thousand ready. That was June. Six weeks later, the Bachmans had the money, signed the June contract, wrote a check and East Coast started work. So far, so good. At least so it seemed.

Unfortunately, the job didn’t go as planned. There was a dispute. Bill Bachman insisted the framing required hurricane ties and accused East Coast of damaging the septic system with a tractor. Tempers flared. Bachman ordered East Coast’s crew off the site and stopped payment on checks totaling $29,000. That put the job on the desk of two attorneys. East Coast’s opening salvo was a suit for breach of contract and foreclosure on their mechanics’ lien.

I’ve said it before. But it bears repeating. When a job goes bad, you better have a good contract.

The Bachman’s attorney reviewed East Coast’s contract and found two problems.

First, both Connecticut law and Federal law give a home owner three days to cancel a home improvement contract. The contract has to identify when those three days begin and end. The June contract had June dates for both beginning work and expiration of the three day right to cancel. The Bachmans didn’t sign the contract until July. So dates in the contract signed by the Bachmans didn’t work.

The court agreed: East Coast Custom Builders, LLC v. Bachman, 2011 Conn. Super. LEXIS 765. March 2011. Failure to identify the beginning date and end date for the three-day right to cancel made the contract unenforceable. East Coast lost on the claim for breach of contract.

But could East Coast collect on their mechanics’ lien? Every state gives contractors a claim for labor and materials used to improve property. Sorry, said the court. Connecticut’s Home Improvement Act voids lien rights when a contract is defective.

Bad news for East Coast. But it got worse. That was the second problem.

The contract gave attorney fees to East Coast if suit was necessary to collect. That must have been reassuring to East Coast. But Connecticut law makes the right to collect attorney fees reciprocal when a company sues a consumer. That means East Coast would have to pay the Backmans’ attorney fees if the Bachmans won in court. And that was Judge Markle’s ruling. East Coast was liable to the Bachmans for $13, 875 in attorney fees.

It’s easy to criticize the court’s decision. The Bachmans had 6 weeks to cancel the deal and didn’t. East Coast lost on a technicality. That should be a lesson for every contractor. Pay attention to what’s in your agreements. Courts take contracts very seriously. You should too.

If you’re serious about using good contracts, have a look at Construction Contract Writer. The trial version is free.

Saturday, April 9, 2011

Protect Yourself from Surprises

In construction industry, the unexpected tends to be expensive bad news. And with every surprise comes an obvious question, “Who’s going to pay?”

Owner: “Look, it’s not my fault. You should have known about this. I’m not going to cover for your mistakes.”

Contractor: “This is extra work – not part of the deal. I’ll do what’s required. But I have to charge extra.”

Every surprise has the potential to become an acrimonious dispute.

A Catalog of Surprises
The list of possible surprises on a construction project must be nearly infinite. But most of the surprises likely to cause a dispute fit in one of three categories:
• Mistake or omission in the plans – something the designer, architect or engineer didn’t consider.
• Differing site conditions – hidden or highly unusual conditions no one would have anticipated.
• Change in scope of the work – something discovered later, such as by the inspector.

Get Paid for Surprises
A good contract will resolve most disputes about what’s included and excluded. Point to a contract clause that covers the point in dispute and you’ve won. But I’ve never seen a construction contract that covers every possible surprise. You won’t either.

Federal public works contracts include a changed site conditions clause, giving the contractor a claim when there’s a surprise. That way, contractors don’t have to bid the worst case. They can bid what’s expected. Little or no contingency allowance is needed. That encourages more competitive bids.

But there’s clearly a better way to protect yourself. Limit the job to what’s in your bid or proposal. It’s not permitted on most public works contracts. But it’s perfectly legal in private contracts. Anything omitted from the bid is not part of the job, no matter what other contract documents say.

On a public works job, the awarding authority won’t even look at a contractor’s estimate. Submit a detailed estimate with your bid and the contracting officer will trash it – or consider your bid non-conforming. On a private job, nothing prohibits including a detailed estimate with your bid and having that estimate define the scope of work. Anything not in the estimate is not part of the job, period. The more detailed your estimate, the better you’re protected against surprises.

With a single stroke, you’ve eliminated nearly all risk due to surprises – whether a mistake in the plans, differing site conditions or a change in the scope of work.

When you have a choice, make your estimate define the job. It’s both legal and good contracting practice. None of the boilerplate contracts sold by national trade organizations include this important protection.

To see how your estimate can define the job, have a look at Construction Contract Writer. The trial download is free.

Thursday, March 10, 2011

California Home Improvement Contracts

We can agree that consumer protection laws serve a useful purpose. But laws too complex invite evasion. California’s home improvement contracting law is a poster child for that proposition. Most contractors don’t comply simply because they can’t figure out what the law requires. California’s CSLB assesses fines (“civil penalties”) against contractors who don’t comply – but does very little to make compliance easy.

Making It Easy
I’ve listed below everything California requires in a home improvement contract. Any residential job (including painting, landscaping and yard improvements) for more than $500 that’s done for an owner or a tenant occupying a residence needs these notices and disclosures. If you’re interested, required notices and disclosures make up 18 pages of this 21-page contract.

The entire contract has to be in writing, legible and in at least 10 point type.
Page 1 -- The title "Home Improvement Contract" in boldface type.
Page 1 -- The statement: "Any Notice of Cancellation can be sent to this address."
Page 1 -- The name and the address of the contractor.
Page 1 -- Name and registration number of any salesperson.
Page 1 -- The date the contract was signed by the owner.
Page 1 -- In 12-point bold type: "You are entitled to a completely filled in copy. . .”
Page 2 -- The contract price in dollars and cents.
Page 2 -- An approximate date when work will begin.
Page 2 -- What constitutes substantial commencement of the work.
Page 2 -- An approximate date of completion.
Page 2 -- The heading “List of Documents Incorporated into this Contract.”
Page 3 – The down payment can’t exceed $1,000 or 10%, whichever is less.
Pages 3 and 4 -- A payment schedule showing the amount due by job phase.
Pages 4 and 5 – California’s Mechanics’ Lien Warning.
Page 5 -- A statement on release of lien in exchange for payment.
Page 6 -- Confirmation that the contractor carries (or doesn’t carry) liability insurance.
Page 6 -- The name and phone number of the insurance carrier.
Page 6 -- Information about the Contractor's State License Board.
Page 8 -- The statement on performance and payment bonds.
Page 8 -- Notice of California’s 3-day right to cancel.
Page 9 -- A checklist for homeowners.
Page 10 -- Information about commercial general liability insurance.
Page 11 -- A change order form incorporated into the agreement.
Page 11 -- Notes about extra work and change orders.
Page 11 -- A statement on requirements for a change order.
Page 12 -- Receipt acknowledging delivery of the California’s 3-day right to cancel.
Pages 13 and 14 -- California 3-day Notice of Cancellation.
Pages 18 and 20 -- Federal right of rescission (Reg Z) notice.
Pages 19 and 21 -- Explanation of the effects of rescission.
In the specs -- A description of the site and significant materials to be used.
In the specs -- Brand names if brands were mentioned during negotiations.

Add if the job includes a residential swimming pool:
Page 9 -- Checklist for homeowners -- swimming pools.
Plans and specs -- A plan and scale drawing of the pool.

Add if the job includes structural pest control:
Page 3 -- A reference to the structural pest control inspection report.
Page 7 -- A lien notice for the owner in Bus and Prof Code section 8513.
Page 7 -- Right to contract for pest control, B and P Code section 8514.5.

Add if the job includes thermal insulation:
Page 15 -- Disclosure of insulation material, R-value and coverage area.

Add if arbitration is required to settle disputes (residential):
Page 5 -- A disclosure that disputes must be settled by arbitration.
Page 6 -- Initialed consent that disputes will be settled by arbitration.

Add if the contract includes a credit term (retail installment contract):
Page 6 -- California security agreement notice and disclosures.
Pages 16 and 17 -- Federal Truth in Lending disclosures.

Easier Still
Craftsman's Construction Contract Writer drafts perfectly legal construction contracts for every state: residential and commercial prime contracts and subcontracts, cost-plus (time & material) contracts, green LEED contracts (commercial, IT or gut-rehab), home improvement contracts, pool contracts and construction management (consulting) contracts. The trial version is free.

Sunday, February 20, 2011

Do CM Contractors Need a License?

Last month I listed advantages of construction management (CM) contracting over traditional general contracting. For example, construction contracting is a highly regulated occupation – liens, payments, codes, inspections, bonding, insurance, etc. CM contractors avoid most of these headaches. But if your state requires construction contractors to be licensed, do CM contractors need a license?

That’s a very good question. Remember that CM contractors are consultants. They don’t install materials and don’t have subcontractors. Why would they need a license?

Don’t answer that question before looking carefully at the licensing statute in your state. Usually the term construction contractor is defined very precisely. Sometimes that definition includes construction management and sometimes it doesn’t. For example, Washington D.C. Code of Municipal Regulations § 17-3905.2 requires that construction managers comply with all standards that apply to general contractors. The same is true in Virginia. VA Code Ann, § 54.1-1100.

Licensing statutes in other states don’t mention construction management. That leaves the issue open for courts to decide. Tennessee courts have decided that CM contractors need a license (Lowrey v. Tritan Group Ltd., 2009 U.S. Dist. LEXIS 60312). The same is true in New York (Liberty Management & Construction v. Wasserman, 1996 U.S. Dist. LEXIS 4408).

California courts have decided (at least for now) that CM contractors don’t need a contracting license. If you’re interested, the case is The Fifth Day, LLC v. Bolotin. The case was decided in March of 2009 by a court split 2 to 1 and includes a well-reasoned dissent. Expect the Bolotin decision to be overruled the first time a homeowner brings suit against an unlicensed CM home improvement contractor.

In other states where general contractors need a license, the licensing of CM contractors will remain an open question until the legislature speaks or a court has to decide the issue.

Even if your state doesn’t require a license, I think there are at least three reasons why a CM contractor should have the same license that a general contractor needs. First, having the appropriate license is reassuring to everyone concerned – the owner, trade contractors, suppliers, lenders and design professionals. Second, I believe courts and legislatures are going to recognize the growing popularity of CM contracting and close any loophole that permits CM contractors to work without a license. You don’t want to be caught in that loophole just when the loophole gets plugged. Finally, the penalty for operating without a license is severe. In many jurisdictions, an unlicensed contractor has no right to collect. Don’t take that risk.

I also recommend that your CM contracts include all notices and disclosures required in your state for the particular type project. Here’s a state-by-state list.

The AIA, AGC and CMAA publish model CM contracts. None include the notices and disclosures required by state and federal law. That makes these model contracts illegal for most jobs in most states. The free download of Construction Contract Writer includes a sample CM contract that complies with both federal law and the law in your state, regardless of the type of construction – residential, commercial or home improvement.

Tuesday, January 25, 2011

Paper Contracting

When you hear the term paper contractor, it’s usually in the context of someone being “only” or “just” a paper contractor. I believe this prejudice against general contractors working as consultants is breaking down. And for good reason.

What was known as paper contracting in the last century has morphed into construction management (CM) contracting in the 21st century. CM contracting is replacing traditional construction contract practice on many types of projects -- from the largest public and private jobs to small home improvement projects. Traditional construction practice (prime contractor and subcontractor) has disadvantages that every traditional prime contractor knows all too well: risk of loss, oppressive state regulation, warranty problems, construction claims and callbacks. Modern construction managers avoid most of these hazards by limiting their responsibility to what they do best -- construction management. CM contracts leave the construction headaches to others -- liens, trade disputes, slow payment, code compliance, inspections and government regulation.

What is a construction manager (a paper contractor)? That’s easy. A construction manager earns a fee as a consultant:
Reviewing the plans and specs.
Preparing bid packages and evaluating bids.
Checking insurance coverage.
Approving the proposed contracts.
Communicating with contractors and suppliers.
Monitoring day-to-day construction.
Keeping the owner informed of progress.
Approving payment requests.
Assisting with change orders.
Protecting the owner from construction claims.
Directing project closeout.

What's NOT included in a construction manager’s portfolio? That’s easy too. The construction manager earns a fee for consulting services -- period. The construction manager neither buys nor installs materials, has no contracts with the trades and pays no bills. The owner signs contracts with trade contractors, pays all the bills and holds installing contractors responsible for their work.

Most of a construction manager’s task will come as second nature to an experienced general contractor. What won’t come easy is the construction management contract itself. CM contracts are very different from traditional prime contracts -- and have to be drawn precisely to avoid problems with property owners, trade contractors, suppliers and state regulators.

The recent case of Thurber Lumber Co. v Marcario underscores my point. Joe Marcario agreed to manage construction of a new home for Don Nenninger in Suffolk County, NY. Marcario ordered materials from Thurber Lumber and recommended trade contractors for the job. Marcario forwarded bills from subs and suppliers to Nenninger and Nenninger paid those bills directly. That worked fine until Nenninger ran into trouble with financing and stopped making payments. Thurber Lumber sued both the contractor (Marcario) and the owner (Nenninger) for $59,391.51 and got a judgment against both. Too bad for Marcario. Marcario didn't explain that he was working as a paper contractor (consultant), not a general contractor. Nenninger alone would be liable for materials delivered to the Nenninger job. Marcario could have made that clear by giving Thurber a summary of his CM (consulting) contract before placing the first order. But Marcario didn’t have a written contract for the Nenninger job. And that was Marcario's $59,391.51 mistake.

Moral to the Story
Don’t try CM contracting without a good CM contract. The free trial version of Construction Contract Writer comes with a sample construction management contract that’s legal in your state.  If you want to know more about construction consulting, I can recommend a new book, Paper Contacting.