2014 Construction Contract Law

Twenty-five states have made changes to construction contract law in the last six months. Some of these changes are trivial. Others will affect contracts for most jobs in a state. The highlights:

Arizona Revised Statutes § 34-227 voids any provision in a contract which would make public works construction in Arizona subject to the laws of any other state.

District of Columbia has set payment deadlines for both prime contracts and subcontracts. Late payment earns interest at 1.5% a month plus attorney fees. 60 District of Columbia Regulations § 11812 voids any clause in a subcontract which would waive the right to file a lien or collect on a payment bond.

Hawaii allows only contractors to apply for building permits on most residential jobs unless the owner qualifies for an exemption. Hawaii Revised Statutes § 444-23.

Maryland now requires three specific notices in home repair contracts. Code of Maryland Regulations § 09.08.01.26

Massachusetts has repealed a code section that set a time limit for making claims for extra work on public works projects. Massachusetts General Laws 29, § 20A

New York has decided (for now) that construction management contractors on residential jobs are not required to comply with New York home improvement law. 84 Lumber Company v, Barringer, 110 A.D.3d 1224 decided October 17, 2013. Expect this decision by the appellate court to be reversed, probably by legislation, as happened in California earlier this year. Otherwise, carefully drafted construction management contracts could do an end-run around New York’s home improvement contract law, General Business Law, § 770 to 776.

Virginia has changed the notice (18 VAC 50-22 Appx. RBC) which must appear in residential contracts. Virginia Code Annotated Section 43-3-D now denies construction lien rights to anyone doing work without the appropriate license or certificate.

Utah and Wisconsin have become the 14^th and 15^th states to give owners the right to cancel a residential construction contract if:

• Any part of the work involves repair of storm damage and
• At least part of the cost of repair is expected to be covered by insurance, and
• Any part of the insurance claim is denied by an insurance carrier.

Utah Statutes § 13-50-202 is effective now. Wisconsin Statutes § 100.65 becomes effective on January 1, 2014. My blog post of November 30, 2012 lists the 13 other states that have adopted similar statutes -- all in the last three years. In most of these states, the contract has to include a notice explaining the right to rescind. Omitting the notice can earn the contractor a fine of up to $1,000.

It’s easy to be sure your contracts comply with these changes and all state law. Get Construction Contract Writer. The trial version is free.

Rocket Lawyer: Caveat Emptor

Search for “free construction contract” on the Web and you’ll find Rocket Lawyer near the top of the paid ads. You’ll probably see claims in that ad: “100% free” and “binding in each state.” What could be wrong with that?

I’ll count the ways.

“Free” is a stretch. Rocket Lawyer is a relationship marketing company. They monetize relationships – including any relationship they can develop with you. To see their “free” contract, you have to surrender an email address and your credit card number. That begins your free trial – which turns into a paid $39.95/month subscription if you fail to cancel during the first week. Is that “free”? I’ll let you decide.

“Binding in each state” isn’t a matter of opinion. It’s a matter of law. If you’re a contractor, Rocket Lawyer misses by a wide margin. I’ll explain.

Nearly every state requires specific notices and disclosures in construction contracts – especially on residential and small commercial jobs. These notices are different in every state and vary with size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. Any contract that omits a required notice is likely to (1) be unenforceable by the contractor, and/or (2) expose the contractor to a fine, and/or (3) result in discipline by the license board. In some states, omitting a required notice is punishable by jail time.

So, how does Rocket Lawyer deal with special notices and disclosures required by state and federal law? It doesn’t. Rocket Lawyer’s construction contracts ignore important state and federal disclosure laws. I think that’s irresponsible, especially considering the claim that Rocket Lawyer contracts are “binding in each state.”

Some Examples

Rocket Lawyer contracts omit key notices required by state home improvement contract acts. A contractor using a Rocket Lawyer contract could face:
California – Discipline by the CSLB, including revocation of a license.
Connecticut – A $1,000 fine or 6 months in prison or both.
District of Columbia – A fine of up to $300 and 90 days in jail.
Florida – A $500 fine for omitting the Recovery Fund notice.
Hawaii – Both the contract and the contractor’s statutory lien rights are void.
Massachusetts – Suspension of registration, fines up to $2,000 and a year in jail.
Maryland – A fine of $1,000 and 6 months in jail.
Maine – A fine of between $100 and $1,000 for each violation.
New Jersey – A refund of all money collected or treble damages plus legal fees.
New York – The contractor can’t sue to collect on the contract.
Oregon – A civil penalty of up to $5,000 for each offense.
Pennsylvania – Paying the owner three times actual damages plus attorney fees.
Texas – Paying the owner a $500 penalty.

Thirteen states require special contract notices when the cost of a job is at least partially covered by property insurance. Heavy penalties apply if a contractor ignores the law. Rocket Lawyer doesn’t even consider the issue.

Many states require special disclosures when an agreement is negotiated on the job site. And federal law requires a three-day right to cancel every time you work on the primary residence of the owner. Again, Rocket Lawyer offers no help.

My advice on Rocket Lawyer construction contracts: caveat emptor (buyer beware).

Instead, consider Construction Contract Writer. You'll draft perfectly legal agreements for nearly any type of construction project in any state. The trial version is free – no strings attached.

Tilt the Contract Your Way

All construction contracts are not created equal. Most attorneys will confirm that they could write a construction contract that either:

1. Makes it nearly impossible to lose money on the job, or
2. Makes losing money on the job almost certain.

That’s called contract bias. Every construction contract has bias, favoring either the property owner or the contractor. You have better control, more options and extra security when contract bias is in your favor. Don’t believe any claim that a contract is “standard” or has no bias. There is no such thing as a standard construction contract just as there is no such thing as a standard construction project.

Here’s my list of 10 contract clauses that favor the contractor and another 10 clauses that favor the owner.

Clauses favoring the contractor:

• Anything not in the contractor’s estimate will be at extra charge.
• Design defects are corrected at the owner's expense.
• No retainage will be deducted from payments due.
• Changes required by law are charged as extra work.
• Changes will be charged at the normal selling price of the contractor.
• The contractor provides no warranty other than required by law.
• Disputes have to be resolved by arbitration, not litigation.
• The contractor gets paid for delay caused by the owner.
• Final payment is due 30 days after termination.
• Any defect not on the punch list is accepted..

Clauses favoring a property owner:

• The contract price covers job conditions as they exist.
• The contractor is responsible for hazmat found on the job.
• The owner can reject any work considered defective.
• Any ambiguity in the plans is resolved in favor of the owner.
• Final payment releases all contractor claims.
• Claims for extra work expire if not made in writing within 5 days.
• Unsatisfactory work must be removed at the contractor's expense.
• The contractor provides a broad form warranty on all work completed.
• The contractor is liable for any loss suffered by the owner (indemnity).
• The contractor has to pay for any corrections required by law.

Contract clauses like those above can create a very one-sided contract. But there’s no need to bend every contract clause your way. A more balanced contract will be accepted sooner with fewer revisions. If you want to shift contract bias your way, be selective. For example:

• If the owner is in a hurry to take occupancy, pay close attention to bias when dealing with the construction schedule.
• If the plans aren’t as complete as you would like, consider bias very carefully when spelling out how the owner gets charged for extra work.
• If materials have to be ordered and paid for before work starts, require an initial payment that covers your up-front costs.

With Craftsman’s Construction Contract Writer, bend bias any way you want. Or draft a fair and balanced contract that offers a little extra protection when there's more risk. It's entirely your choice. The trial version is free.

Seven Ways to Avoid Surprises

Was there ever a construction project that went exactly as planned?

More often, you’re going to have a surprise, something unexpected – like a mistake in the plans or some site condition that requires extra work. Anything can go wrong on a job. And the result is nearly always the same – extra time and higher cost. No contractor is immune from surprises. But it’s easy to limit the damage when a surprise happens.

Contractors aren’t insurance companies. You shouldn’t have to make good at your own expense every time something goes wrong on a job. And you won’t with the right contract. Good contracts allocate risk between the owner and the contractor. Courts enforce contracts the way they’re written. If you write the contracts for your jobs, here are seven good ways to avoid losses from the unexpected.

Make your bid define the job. Describe the materials you plan to install, not the finished job. For example, if you’re replacing a roof, the bid might show "Remove and replace 18 squares of composition shingles and 80 linear feet of flashing.” If sheathing has to be replaced (a surprise), that’s at extra cost. Don’t quote a price simply to “re-roof with composition shingles.” That could be interpreted to include whatever sheathing is needed.

Exclude specific site conditions. Even the best site inspection isn’t going to uncover every potential surprise. Your contract should exclude mold, structural pests, hazmat, defective work by others, subsidence, unsuitable soil, rising water, zoning restrictions, setback requirements, HOA rules, severe weather and concealed obstructions such as water, power, waste, drain, communication and gas lines.

Exclude errors in the plans. Mistakes are common in plans and specs. Contractors aren’t licensed design professionals. You don’t have an obligation to find design flaws. Give notice when you spot a mistake. Then get an agreement on the cost of extra work.

Narrow interpretation of the plans. If the plans and specs don’t describe some detail or material, that detail or material is not part of the job. For example, a home plan that omits the roof is a plan to build a home without a roof.

Changes in the law. Anything extra required to conform to changes in law, code, ordinance or regulation is extra work to be done at extra cost.

Be prepared to prove the claim. Avoid disputes that begin “I said. . .” or “You said. . .” Keep a written record showing extra labor, material and equipment expense. Give the owner a copy as the extra work is being done.

Set the value of extra work. The contract should identify how charges for extra work will be calculated. The best choice is your “usual selling price.” The second best option is the cost of labor and materials plus your usual markup. Payment for extra work is due when that work is done.

Don’t take a loss every time there’s a surprise. Cover these seven points in your contracts. Using Construction Contract Writer makes that easy. The trial version is free.

Set the I-Codes Free

I’m old enough to remember when the building code was a slim little volume -- slipped easily into the back pocket of my overalls. Not true now. The code comes in over a dozen flavors, has thousands of pages and carries a price tag to match. The International Residential Code by itself is over $100, whether on paper or by subscription. That’s OK, I suppose. The International Code Council claims they publish the “highest quality codes.” Maybe so. But I have a problem with what happens next.

The ICC pushes to get their codes adopted as law in states and cities all across the US. That’s OK too, except for one point. The ICC requires a copyright notice on each code when adopted. In other words, the ICC claims to own the law. That would make the building code the only law I know that isn’t free on the Web. You have buy a copy of the code to know what the law requires.

It’s easy to see why the states, cities and counties adopt I-Codes. They’re buying good law on the cheap – a much better choice than drafting new law from scratch. And the ICC is eager to deal. Every adoption means more code books sold by the ICC store.

What’s Wrong with This Picture?

The ICC strikes a moral, altruistic pose. They’re protecting life and property. “People Helping People Build a Safer World.” Who can argue with that? But the ICC is also expert at protecting its turf. Consider the intense struggle the ICC had with the NFPA for dominance in code adoptions. More problems: The ICC is a tax-exempt non-profit organization. But over 5% of revenue goes to executive compensation. That's a lot for a non-profit, $4 million last year. I’ll leave that issue to the I.R.S. My complaint is that only code-enforcement officials sit on the ICC Board. No one on the Board speaks for the public. That makes the ICC revenue model an easy decision: The ICC writes the code. States adopt the code. The public has to buy the code.

When government grants a monopoly to private enterprise, regulation follows. In this case, states, cities and counties grant a monopoly by adopting an I-Code. But they exercise no influence I can see over ICC practice. Instead, state and municipal governments toe the line, reproducing the ICC copyright notice on each code adopted. Is that what government is supposed to do?

The U.S. Compendium of Copyright Office Practices answers that question for Federal purposes. “Edicts of government, such as judicial opinions, administrative rulings, legislative enactments, public ordinances, and similar official legal documents are not copyrightable for reasons of public policy.” Or, as Supreme Court Justice Stephen Breyer said, “if a law isn't public, it isn't a law.” Any regulation the Federal government doesn’t publish is void. So you won’t see I-Codes adopted by Federal agencies. The same public policy should apply to states and municipalities. But it doesn’t, at least in the opinion of the ICC. Fortunately, not every court agrees.

In Veeck v. Southern Bldg. Code Congress (2002), the 5th Circuit of the Court of Appeals rejected copyright claims over model building codes that were incorporated into Texas law. “[P]ublic ownership of the law means precisely that ‘the law’ is in the ‘public domain’ for whatever use the citizens choose to make of it.” So at least in the 5^th Circuit (Louisiana, Texas, Mississippi), a copyright notice on a model code adopted by government doesn’t mean much. Until the U.S. Supreme Court addresses the issue, status in other states is uncertain.

What to Do

If I-Codes truly make a safer world, adopted state versions should be readily available to anyone, the same as any other law. You can view current I-Codes at the ICC site (but without printing, copying and indexing features). Public.Resource.org offers a free download of state and municipal versions of the I-Codes. If you agree that our law shouldn’t belong to any private company, click the button at the bottom of the Public.Resource.org home page to make a donation.

New Laws Will Affect Home Builders

Residential contracting is a highly regulated industry. To stay in business, contractors have to comply with state and federal law. That’s not easy, at least partly because new laws are piled on every year. Right now, legislatures in twelve states are considering bills that would affect home builders and home improvement contractors. Nearly all of these bills add to your cost of doing business or risk of making a mistake.

Here’s my state-by-state rundown of residential contracting bills introduced in the last few months. Expect many of these bills to become law before too long.

• Connecticut – Senate Bill 319 would prohibit mandatory arbitration in home improvement and home construction contracts.
• Hawaii – Senate Bill 1077 will require residential owner-builders to deduct withholding tax and provide workers’ compensation insurance for anyone working on the job who isn’t a licensed contractor. (Effective 7/1/13)
• Iowa – Senate Bill 497 would require that contractors buy a $50,000 surety bond before agreeing to do any home improvement work. (Passed the Iowa Senate)
• Massachusetts – House Bill 194 would limit the down payment on most residential jobs to one-third of the contract price and require that the contract include a payment schedule.
• Maine – Senate Bill 459 would require that all residential contractors be licensed.
• New York – Assembly Bill 459 would require that home improvement contractors have a license and a surety bond. Assembly Bill 1081 would levy a $5,000 fine for violating the Home Improvement Contracts Act. Assembly Bill 1903 would allow owners to withhold up to one-third of the contract price until 15 days after completion of home improvement work.
• New Jersey – Senate Bill 2658 would make failure to complete a home improvement project a crime. Home improvement contractors would need a $25,000 surety bond.
• Pennsylvania – Senate Bill 686 and House Bill 1543 would permit time and material (cost-plus) home improvement contracts.
• Kentucky – House Bills 180 and 249 would set standards for all home improvement contracts. Any contractor who charges more than four times the fair price or misrepresents or conceals a material fact would be guilty of home improvement fraud.
• Kansas – House Bill 2065 creates the crime of home improvement fraud. (Passed the House)
• Wisconsin – Assembly Bill 81 gives owners the right to cancel contracts for insurance repair work if any part of the insurance claim is denied. Wisconsin and Utah will become the fourteenth and fifteenth states to enact laws requiring disclosure of the right to cancel a contract for insurance work if the claim is denied. For the first thirteen states, see my blog of November 30, 2012.

Even if your state isn’t on the list, be forewarned. New law is headed your way. To be sure your contracts meet standards that apply in your state, have a look at Construction Contract Writer. The trial version is free.

Is My Contract Legal?

Most construction contractors have a favorite agreement they use again and again. “My contract worked fine on my last job. It’s a good choice for my next job.”

I don’t necessarily agree. But I understand the logic. You don’t have time to negotiate contract terms on every job. You’re a builder, not a lawyer.

If that’s how you feel, OK. I’m not going to confuse you with the facts. But I’ll offer one point on which all can agree. If you have only one contract, make sure it’s legal. Too often, it’s not. Using a bad contract again and again is like walking a tightrope. Eventually you’re headed for a spill.

A case decided last week in Ohio illustrates my point, Garber v. STS Concrete Co., 2013 Ohio 2700. Frank Suglio runs STS Concrete in North Olmstead. Pat Garber needed repair work on his driveway, sidewalk and steps. A neighbor recommended STS. Frank bid the job at $6,200. Pat signed the STS contract and Frank did the work. Before too long, the concrete developed cracks. Pat wanted repairs. Frank wouldn’t do it. So Pat sued STS and won – not for the cracks but for a bad contract. The trial court awarded Pat three times the cost of job, $18,600, plus attorney fees of $5,524.24. Remember, this was for a $6,200 job!

What did Frank do wrong? The court never considered cracks in the concrete. Instead, the trial court judge came down hard on the STS contract. Notices required by Ohio’s Home Solicitation Sales Act were omitted. That was Frank’s $24,124 mistake.

But that wasn’t the end. STS appealed. This time STS won. The judgment was reduced to a full refund, only $6,200. Still, that’s a stiff price for a simple mistake.

Three Important Points

1. You’re on your own. It’s your responsibility to write contracts that comply with the law in your state. No state makes that easy.
2. Only a contractor gets penalized for a bad contract. Owners have no risk at all.
3. This isn’t simple. States have specific requirements that vary with the type of work: residential or non-res, pools and spas, insurance work, large jobs, small jobs, what’s included in the job, where the contract was signed. The list goes on and on.

So What Should You Do?
Here’s my suggestion. It’s quick, easy and free. Check you contract against contracts drafted by experts. The site is here. There's no charge for a free trial. Build a contract that meets requirements for your job and complies precisely with laws in the your state. Check your contract against the free trial version. It’s the best way I know to avoid what happened to STS Concrete. When you're satified that Construction Contract Writer is a better tool for drafting construction agreements, get the full program here.

Picking up the Pieces in Oklahoma

Losses from the Moore, OK tornado run into the billions of dollars. Over 12,000 homes have been seriously damaged or destroyed. Healing that loss will take years.

But unlike hurricane Sandy, most losses from the Oklahoma tornado will be covered by insurance. If you’re planning to do insurance repair work in Oklahoma, there’s some new law you need to understand. Oklahoma Statutes Title 59 § 1151.21 became effective in August 2011. Here’s your checklist.

ü  Owners have the right to cancel. If any part of the repair is expected to be covered by insurance, an owner can cancel the contract up to 72 hours after an insurance carrier denies any part of the claim.

ü  Notice in the contract. Your insurance repair contract has to include a disclosure in at least 10-point bold type.

You may cancel this contract at any time within seventy-two (72) hours after you have received written notification from your insurer that your claim to pay for the goods and services to be provided under this contract has been denied. See attached Notice of Cancellation for an explanation of this right.

ü  Cancellation notices. Duplicate cancellation notices have to be attached to the contract. The notices have to be in at least 10-point bold type and include the contractor’s name.

 NOTICE OF CANCELLATION If your insurer denies all or any part of your claim to pay for goods and services to be provided under this contract, you may cancel the contract by mailing or delivering a signed and dated copy of this cancellation notice or any other written notice to [Contractor Name] at [Contractor Address] at any time within seventy-two (72) hours after you have received written notice that your claim has been denied. If you cancel, any payments made by you under the contract will be returned to you within ten (10) business days following receipt by the contractor of your cancellation notice. I HEREBY CANCEL THIS TRANSACTION. [Date and signatures]

Failure to comply is a misdemeanor under Oklahoma law and could cost you $500 for each violation.

If even part of the claim is denied, the owner has 72 hours to walk away. After cancellation, you have ten days to make a full refund, no matter how much work was done. Starting work before the claim has been approved is like walking a tightrope. Plenty of risk.

What about Emergency Work?

The law makes an exception for emergency repairs done before the claim is approved. Even if the job is cancelled, you can collect the fair value of emergency work -- but only if acknowledged in writing by the owner to be necessary to prevent damage. Don’t even lift a hammer without a signed statement: “I agree to pay $____ for the following emergency work _________.”

If you’re doing insurance work in any other state, be careful! My blog post of November 30, 2012 lists 13 states that have adopted similar statutes in the last three years. Texas is probably next.

But there’s no need to take risks on insurance repair work. Construction Contract Writer will protect your pocketbook no matter where you work. The trial version is free.

The 3-Day Right to Cancel: A Contractor’s Checklist

Every contractor knows about an owner’s 3-day right to cancel: Agree to build or improve your client’s primary residence and the owner has three days to cancel the deal. It’s federal law (12 C.F.R. 226.15) and applies in all states. Make a mistake on this and the owner has three years to cancel. Here’s a checklist to keep you out of trouble.

[  ] Each owner has to receive two copies of the 3-day cancellation form – commonly called the Reg. Z notice. But simply leaving the forms with the owners isn’t enough. You have to fill in some blanks.

[  ] Your company name and address. That’s easy. The owner needs to know where to send the cancellation notice.

[  ] When the three days starts running. That’s not obvious. There are three possibilities. The last to occur starts the three days:

1. The date of the transaction.

2. The date the owner receives the Truth in Lending Disclosures.
3. The date the Reg. Z notice is delivered.

If your contract and the Reg. Z notice are two separate forms, the three days starts running when the Reg. Z notice is delivered, not when the contract is signed (the “date of the transaction”). The best choice: Make the Reg. Z forms part of your contract. Deliver both together. That way, the three days start running when the contract is signed. If you use Craftsman’s Construction Contract Writer, this is automatic.

The second option above doesn’t apply. There aren’t any Truth in Lending Disclosures if payment is due when the job is done.

[  ] The last day to cancel. Write in the last day your client can cancel the contract. Again, this date has to appear on all copies of the Reg. Z form left with your client. 

The last day to cancel is the third business day after the contract was signed. Business days exclude only Sundays and national holidays under federal law. So if the contract was signed on Thursday, the last day to cancel is midnight on Monday. If either Friday or Monday is a national holiday (banks are closed), the last day to cancel would be the following Tuesday.

But be careful. Cancellation is effective when the notice is mailed. The cancellation notice may not be delivered for several days. So it's best to touch base with the owner before scheduling any work or deliveries.

[  ] An owner doesn’t have to use the Reg. Z form. A phone call would be enough to cancel the deal.

[  ] In a true emergency, an owner can waive the 3-day wait. The waiver has to be (1) in the handwriting of the owner, (2) be dated and signed, (3) describe the emergency and (4) specifically waive the right to cancel. For example, “My roof blew off and another storm is due later this week. I give up my right to cancel this contract.”

Click here to see a contract-drafting tool that complies perfectly with the law in your state and for the types of work you handle. The trial version is free.

 

Change Orders You Can Believe In

A contractor I know took on a small job at a popular ski resort in Colorado a few years ago. The owner of a chalet wanted a new sundeck, plus some interior work in an unfinished basement -- a few week's work. My contractor friend wrote up a bid, offered his usual agreement, got the owner’s signature and started work.

By mid-October, the deck was done. The owner was pleased. My friend started on the basement. But first, the owner wanted some changes – 5/8” wallboard with vinyl finish. My friend wrote up a change order and got a signature – at the cost of labor and materials plus 10%, exactly as required by their contract. Before the wallboard was up, the owner added Pergo flooring to the job. No problem. My friend wrote out another a change order and got a signature, again at cost plus 10%. Before the basement floor was done, the owner wanted another change -- a bar built into a corner of the basement. My friend wrote out another change order at cost plus 10%. Next, the owner decided that the family room upstairs needed new flooring, again at cost plus 10%. By now, it was past Thanksgiving.

You can imagine the rest of the story. My friend worked in that chalet nearly all winter -- at cost plus 10%. Finally, he asked me if there wasn’t some way out of his cost-plus-10% contract. He was working for wages at a time when good-paying contract work was plentiful.

He should have asked sooner.

The law calls it the cardinal change doctrine. Changes to a contract have to be within the general scope of the agreement and have to be relatively small changes. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract. My friend got into cardinal change territory somewhere between the wallboard and the Pergo.

It Doesn’t Have to Be That Way

Every contractor has an advantage when bidding change order work. If the contract doesn’t cover the subject, the contractor can name the price of changes. There won’t be a competitive bid. Take it or leave it. That’s an uncomfortable position for any owner.

Owners prefer contracts that base the cost of changes on a formula, usually time and materials. That’s where my friend in Colorado got into trouble. He had to prove every penny of extra expense and limit markup to 10%. A deal like that can be a trap. 

Now consider the six states that prohibit cost-plus contracts for home improvement work:

·         California -- Business and Professions Code § 7159(d)(5).

·         Illinois -- Compiled Statutes Title 815, § 513/15
·         Massachusetts -- General Laws 142A, § 2(a)(5)

·         Nevada (residential pools only) -- Administrative Code § 624.6958-2(f)

·         Pennsylvania -- Statutes Title 73, § 517.7(a)(8)

·         Tennessee -- Code Annotated § 62-6-508(a)(5)

In those six states, every change order has to be done at the contractor’s selling price. It’s the law! You have to like that. So would my friend working at the Colorado ski resort.

But Pennsylvania may be about to drop off my list of six. A bill introduced in the Pennsylvania legislature earlier this month would amend Pennsylvania’s Home Improvement Consumer Protection Act -- making cost-plus home improvement contracts legal again in Pennsylvania. Is the bill going to pass? Maybe and maybe not. Regardless, Construction Contract Writer is the best way I know to stay out of trouble with change orders. The trial version is free.

Contracting on a Handshake

“I do business on a handshake – never use a written contract. I know that’s not legal. But I do whatever my customers want. I’ve never had a problem. But I keep my fingers crossed.”

Maybe you’ve heard a contractor make a claim like that. Is there anything wrong with 100% satisfied customers?

I admire the spirit. Earning a reputation for quality work is the best way to build a career, whether in construction contracting or the practice of law. But I can’t endorse paperless contracting. It’s like driving on bald tires – a risk no contractor needs.

Laws in 31 states and the District of Columbia require a written contract for residential work: AR, AZ, CA, CT, DC, DE, HI, IL, IN, KY, LA, MA, MD, ME, MI, MS, ND, NH, NJ, NV, NY, OH, OR, PA, RI, TN, TX, VA, VT, WI, WV and WY.

Twelve states don’t require a written agreement but do require that the contractor deliver a written notice or disclosure before work starts: AK, AL, FL, GA, ID, KS, MN, MO, MT, OK, SD and WA.

And the other seven states? You still have to provide the written Federal 3-day right to cancel on nearly all residential jobs.

And if you don’t have a written contract?

A case decided last month in Wisconsin helps answer the question. It’s a criminal case. State v. Felski, 2013 Wisconsin App. LEXIS 7 (January 2013).

Tom Felski remodeled a kitchen ($21,354.19) and bath ($17,496.39) for Paula and Richard Derrick and got paid in full. Felski had a written contract on both of those jobs. The Derricks must have liked the work Felski did because they agreed to have him do two more projects totaling more than $50,000, a 686 square foot room addition and a garage. But this time Felski didn’t bother getting a signed contract. That’s a problem in 31 states, including Wisconsin. Administrative Code ATCP § 110.05 requires a written contract for home improvement work in Wisconsin. The penalty is a fine of up to $5,000 and a year in jail.

Felski and the Derricks had a falling out before work was done on the garage and room addition. Felski was convicted of violating ATCP § 110.05 on the garage job – no written contract. The Derricks asked the court for restitution of everything paid on both jobs – the garage and room addition. Felski argued that the value of his work on those two jobs exceeded what he had been paid. Not persuaded, the trial court ordered Felski to make full restitution of everything paid on both jobs. A total of $47,274.81.

Lesson learned

Only contractors get penalized for doing work without a written contract. Owners have no risk at all. Remember that the next time an owner offers to do business on a handshake – or insists on using a contract found on the Web. Don’t take chances. Use contracts that comply precisely with both state and federal law. That’s easy with ConstructionContract Writer. The trial version is free.

Making Nice with Sandy

If you’ve never had an insurance repair job, that’s likely to change in 2013. Contractors along the entire eastern seaboard and as far west as Wisconsin and Michigan are about to get an introduction to insurance repair work.

But along with the opportunity comes a problem, as described in an email I received this morning:

"My clients want to get started, even before the insurance claim is settled. I’d be happy to jump into architectural, engineering and permitting right now. But I’m not going to do that without something in writing. How can I get a commitment from the owners before we know the full scope of the job?"

Good question. By definition, there’s no fixed price contract without a fixed price.

One possibility is to do the job on a time-and-materials basis. But that won’t sit well with an owner trying to fit a job inside the insurance settlement. There’s a better way.

The largest engineering and construction companies call it ECI, Early Contractor Involvement. I call it good common sense.

Offer to work with the owner as a consultant from the day planning starts. Help settle the insurance claim. Flesh out the design and engineering. Write an estimate. Pull the permit. All on a fee basis. When the job is ready to bid, you’re sure to have a seat at the table. Sweeten the deal by offering to rebate a portion of the consulting fee if your fixed price bid is accepted.

There will never be a better time for ECI work than right now in the 24 states visited by Super Storm Sandy. It's a rare opportunity for builders.

Now the Hard Part

Managing pre-construction services will be a snap for experienced contractors. What won’t come easy is drafting the contract for that work. This is consulting, pure and simple. But it’s construction consulting. Most states require a written contract with specific notices and disclosures when consulting work is residential and comes with a down payment. Maybe most important, define very precisely what’s included in, and excluded from, your consulting task.

If you need a practical guide to pre-construction consulting, I can recommend Paper Contracting. The e-book download is under $30. For drafting consulting contracts, you won’t find anything better than Construction Contract Writer. The trial version is free.

Before you write that insurance repair contract, glance at my November 30, 2012 blog post. Thirteen states (AL, AZ, GA, IL, IN, KY, LA, MN, MO, NE, OK, SD, TN) now have special rules that apply on insurance repair jobs.