Changes in Construction Contract Law for 2018

Eighteen states have made changes to construction contract law in the last few months. Some of these changes are trivial. A few will affect nearly every contractor in the state. Here’s a state-by-state summary of the highlights:

Arizona: Pool and spa work has to follow a new payment schedule if there’s no bond on the project. Payments can’t exceed 15% down, 25% more on completion of excavation, another 25% after installation of the pool or spa shell, 25% more after installation of the deck, and final payment just prior to application of finishing materials. Arizona Revised Statutes § 32-1158.01

Arkansas: Most residential contractors will have to show proof of current workers' compensation coverage before taking out or renewing a license. Arkansas Code Annotated § 17-25-514

California Labor Code Section 218.7(a) makes prime contractors liable if a sub at any level fails to pay wages or make benefit contributions. To protect yourself, write into subcontracts the right to review the sub’s payroll records. Then be sure subcontracts include the right to charge the sub if the contractor has to pay twice.

Connecticut General Statutes § 42-158k requires that retainage be released no later than 30 days after completion.

Kentucky’s Insured Roof Repair Act (§367.628) prohibits damaging a roof to increase the scope of work. Any violation entitles the owner to recover two times the amount of any damages.

Louisiana contracts for home improvement work offered by registered or licensed contractors have to include proof of liability and workers’ compensation insurance. Louisiana Revised Statutes § 37:2175.2. Penalties for residential contracting fraud have been increased (§ 202.1) to as much as twenty years at hard labor and a fifty thousand dollar fine or both.

Maine Revised Statutes Annotated Title 17 § 908 makes it a criminal act to write a residential construction or repair contract that: (1) Includes misrepresentations or (2) Gives a false impression, or (3) Makes false promises, or (4) Is intentionally deceptive, or (5) Is for repair of damage done by the contractor.

Montana Code § 28-3-704 makes the right to collect attorney fees reciprocal. If your contract includes the right to collect attorney fees if you win in court, you’ll have to pay attorney fees if you lose.

Rhode Island General Laws § 5-65-27 requires a special 3-day cancellation notice in home improvement contracts if one or more of the owners is age 60 or more.

Tennessee Code Annotated § 39-14-154(b) makes it a crime for a new home builder or home improvement contractor to either: (1) Refuse to make a refund when due or (2) Deviate from the approved plans and specs.

Vermont’s Home Improvement Contracts Act (Title 9, § 4010) requires that the following appear in any agreement: (1) Either the maximum price or, if time and materials, a statement that there is no maximum price, (2) A start date and a completion date, (3) Scope of the work including materials to be used, (4) A specific warranty, (5) A specific statement on change orders, (6) A maximum down payment of one-third of the contract price or the price of materials, whichever is greater. A contract that does not cover each of these points is unenforceable against an owner.

You won’t find good news for contractors on this list. Contract requirements for 2018 are stiffer. The penalties are greater. But there’s an easy way to keep your contracts legal, no matter the state. Construction Contract Writer will draft letter-perfect contracts no matter how the law changes. The trial version is free.

Bad Faith 3-Day Rescission

Every contractor knows about the 3-day notice required on residential jobs. Owners get three days to back out of any deal. Starting work sooner than three business days after signing is like giving an owner a loaded cannon. I’ll explain.

The federal three-day right to cancel is called the Reg-Z Notice. Some states also require a state 3-day notice. Most states waive their 3-day notice if you give the federal Reg-Z notice. Other states require their 3-day notice even if you give the federal Reg-Z notice. And there are exceptions – such as for emergencies – under both state and federal law. This isn’t simple. And it’s an issue in nearly every residential construction contract.

Don’t even think about omitting the required 3-day notice (or notices) from a residential contract. If your client wants to start work right away and has a reason, that’s fine. Your owner can waive the 3-day notice. But the waiver has to be done just right – in the owner’s handwriting, in the owner’s own words and covering specific key points. At your option, Construction Contract Writer can include a page that coaches your client through the waiver process.

Now back to that loaded cannon. Here’s an example:

The owner signs your contract. Work starts the next day. The owner sits back perfectly content as work progresses, even for several days or weeks, never letting out a squawk. When work is done, you present a final invoice. That’s when the owner opens fire.

Too bad. I’m not paying. I got your 3-day notice. But you didn’t give me the three days. So the law says I can rescind. That’s what I’m doing. I rescind. Here’s your signed cancellation notice. Now write me a check for what I paid and stay off my property.

Don’t laugh. It happens.

As in a Pennsylvania case decided last week, Waldron Electric v. Caseber. According to the court, Casebar agreed to have Waldron install surge and lightning protection. Waldron had the good sense to offer a valid Pennsylvania home improvement contract for signature. Casebar signed with no waiver of the 3-days. Waldron finished the job the same day. That was Saturday. The following Monday, a notice of cancellation arrived by certified mail at Waldron’s office. Casebar demanded a full refund -- and got it. Then Casebar ordered Waldron off his property. You decide if that was bad faith rescission.

The court didn’t use those words in giving judgment to Waldron. Instead, the court concluded: Because there was an otherwise valid Pennsylvania contract, nothing prevented the trial court from awarding Waldron reasonable value for his services – even without waiting the 3 days to start work. "We recognize that this . . . may provide contractors an incentive to complete work before the three-day rescission period ends . . . The result, however, is compelled by the statutory language.”

Pennsylvania law saved Waldron. If you do work anywhere else, be careful. The law in your state may not be so forgiving to contractors. On every residential job, get a valid contract. Construction Contract Writer will do that. The trial version is free. Then either wait three days or get a waiver.

Please don’t misunderstand my point. I’m not dissing the 3-day right to rescind. It’s just about eliminated high-pressure selling tactics for home improvement work. But the right to rescind can do damage too. With a little care, any contractor can keep this dangerous weapon out of the hands of clients.

 

Oppotunities for PACE Contractors

If you haven’t heard of PACE yet, it won’t be long.

PACE stands for Property Assessed Clean Energy. It’s a new way to finance clean energy improvements and works with almost any property – residential, commercial or industrial. Most states now have a PACE program for commercial properties. California’s new (October 4, 2017) PACE program is likely to become a model for residential clean energy financing in other states.

Here’s how PACE works. First, find an owner who needs clean energy property improvement. The job could be better insulation, a cool roof, seismic or hurricane retrofit, solar photovoltaic, upgrading to more efficient windows or HVAC. May types of work qualify.

 

Then pitch PACE: 100% of the cost will be financed by a loan attached to the property, not the owner. There’s no up-front cost to the owner. The loan is repaid over 5 to 25 years through tax assessments on the property. If the property is sold before the loan is paid in full, the seller pays only for benefits to the date of sale. If done wisely, improvements will reduce energy costs enough to cover the extra taxes.

Residential PACE programs depend on contractors to sell the concept. Nothing happens until a contractor suggests PACE financing for clean energy home improvement.

Selling with PACE

Once you’ve settled on the scope of work and the price, write a contract for the job with Construction Contract Writer. Then draft an assessment contract for approval by a PACE lender. Three days after financing is approved, you’re free to start work. You get paid directly by the lender.

As you might expect, PACE contracting comes with some limits. For example, in California:

• The bid price has to be the same as if the owner were paying cash.
• The contractor has to meet requirements for licensing, permit and business registration.
• Utility savings aren’t guaranteed and won’t affect the extra amount due on property taxes.
• Owners with a recent bankruptcy aren’t good candidates for PACE financing.
• The lender will call the owner to verify full understanding of the assessment contract.
• The owner has three days to cancel the job after an assessment contract is approved.
• Any claim about deductibility of construction cost has to be based on state and federal law.
• The lender can underwrite training expense for contractors but can’t offer any other incentive.
• As with any loan, the owner has to meet income and ability-to-pay standards.

Interest rates for PACE loans are usually a few percent higher than traditional mortgage loans. Administrative fees can add another 5%. But PACE financing rates compare favorably with rates for credit card loans or line of credit loans.

If financing prevents closing a clean energy deal, find a PACE lender authorized to approve assessment contracts in your community. Click here to see a good selection of PACE lenders.

 

Guaranteed Maximum Price Contracting

If you’ve never met a GMP contract, let me provide an introduction. GMP is a handy tool put to good use by many contractors.

Back in July of 2010, I explained why home improvement contractors in six states (CA, IL, MA, NV, PA and TN) use GMP contracts. In those states, time & material contracts aren't legal for most residential work and can't be enforced. That makes GMP contracts an obvious choice. What I didn’t explain back in 2010 was how to write a GMP contract. So here goes.

Think of GMP as a hybrid T&M contract. You invoice for time and materials but also have a guaranteed maximum price. A deal like that meets state requirements, no matter where you build.

Here’s how to draft a good GMP contract, step-by-step:

1. Define the contract price. That’s your cost plus a fee. Your fee could be a percentage of all other costs or a lump sum or a set amount per week or month.
2. Define your cost. That’s usually labor, materials, subcontracts, equipment, supervision and overhead. Make your definitions tight enough so there’s no room for quibbling. More about this later.
3. Decide what records you’ll provide with each invoice. A spreadsheet with receipts and timecard backup is best.
4. Set a guaranteed maximum price in dollars and cents – usually about 25% more than what you would bid on a fixed price basis.
5. Finally, decide how any savings will be split. Fifty-fifty is a good starting point for negotiations. If actual job cost is less than the GMP, savings are split between owner and contractor by this formula.

As with any contract, careful drafting will head off most disputes. Here are the hot spots in any T&M contract:

• What’s included? The answer: Everything reasonably necessary to finish the job. Subpart 31.201-3 of the Federal Acquisition Regulations has the best definition I know for “reasonable” in a construction setting.
• Labor cost includes wages plus taxes, insurance and benefits based on payroll. If you want, list hourly costs for each trade and specialty. Is overtime allowed? At what rate?
• Material and subcontract costs are what you pay after any discount. Remember, under a GMP contract, you have an incentive to keep costs down.
• Equipment costs should include your rental expense and a billing rate for any contractor-owned equipment on the job.
• Supervision expense should include only time a supervisor spends on the job site.
• Overhead expense is usually an estimate expressed as a cost per week or month.

You still have to write change orders – modifying the GMP – for any significant change in scope of work. You still need a weekly or monthly draw schedule based on your costs. And you still could lose money on the job if costs exceed the GMP.

Not every job or client is right for GMP contracting. But if you use Construction Contract Writer, it’s easy to offer alternate contracts – both a GMP and a fixed price contract. Let the owner decide what’s best. An owner who has confidence in your work and understands the advantage of risk-sharing will probably choose the GMP deal.

 

Checklist for Texas Contractors

As I write this, Hurricane Harvey is camped on the Texas coast, dumping rain that will be measured in feet rather than inches. More than 200,000 homes will be affected. Insured damage is likely to exceed $1 billion. The cost of repairing uninsured damage will be billions more. That spells years of work for residential contractors, including many who have never worked in Texas – until now.

As a refresher for experienced Texas contractors and as a checklist for others, here’s a summary of the five principal ways that Texas residential construction contracts have to be different from residential contracts in other states.

Written list of subs. Before construction begins, Texas Property Code § 53.256 requires that the general contractor provide the name, address, and telephone number of each subcontractor and supplier the general contractor intends to use on the job. If subs and suppliers change as the job progresses, no problem. Just amend the list within 15 days.

RCLA notice. Claims for repair of construction defects have to follow the procedure outlined in Texas Property Code § 27.001 to § 27.007. Contracts for work on residences with four units and less must include the RCLA notice. Owners have to follow steps outlined in the RCLA before filing suit. Failure to include the RCLA notice in your contracts gives an owner the right to recover a $500 penalty.

Home Solicitation Sales Notice. If work is on the home of an owner and the contract is signed and negotiated somewhere other than at the contractor’s store, Texas Business & Commercial Code § 601.001 to § 601.205 require a three-day right to cancel in the contract. Omitting that little form voids the contract and gives an owner the right to collect actual damages plus attorney's fees. You’re required to mention the right to cancel at the time the contract is signed. This Texas sales notice is in addition to the Regulation Z three-day right to cancel notice required by federal law.

Lien law. If you’re working on a property that qualifies as a homestead – and most homes do -- liens aren’t automatic. The contract has to be (1) written (2) signed before work is done or materials delivered (3) signed by both spouses and (4) a copy has to be filed with the clerk of the county where the homestead is located.

Residential Disclosures. Texas Property Code Section 53.255 requires a long list of disclosures in residential contracts: Know your rights. Know your contractor. Get it in writing. Read before you sign. Monitor the work. Monitor payments. Lien law warning. Get title insurance. And more. It’s all good advice and has to be in all of your Texas residential contracts.

Texas has no storm damage repair law. In 18 other states, owners have the right to cancel a contract for storm damage repair as late as three days after the insurance carrier denies any part of the claim. Not so in Texas.

If you’re too busy to bother with all these details, there’s an easy way to be sure your Texas contracts are perfectly legal. Get the Texas edition of Construction Contract Writer. The trial version is free.

If you're new to flood damage repair, the best source of cost data for dry-out work is National Home Improvement Estimator.

 

Calamity in Connecticut

Every experienced contractor has seen a job go bad – sometimes really bad. That’s what happened recently to Tankworks Removal and Replacement, LLC, a Connecticut home improvement contractor. One of their projects turned into a financial black hole nearly overnight. And it didn’t have to happen. Two good contracts would have saved the day. I’ll explain.

The home at 575 Thrall Avenue in Suffield, Connecticut had two old heating fuel tanks in the back yard, one below ground and another nearby above ground. Niagara Bank owned the home as part of an estate and was preparing the property for a sale. It’s hard to sell a home with obsolete fuel tanks. So the bank signed an agreement with Tankworks to remove both tanks and install a new tank in the basement.

Tankworks is a licensed Connecticut home improvement contractor. Part of what they do is remove and replace oil storage tanks for residential furnaces. That’s a common home improvement project in Connecticut. Tankworks and the bank signed their home improvement contract on March 3, 2014. From that point, almost nothing went as planned. I’ll list Tankworks’ mistakes.

1. The Tankworks contract didn’t comply with Connecticut’s Home Improvement Act. For example, there was no start date or completion date and no three-day notice of the right to rescind.

2. Work started without notice to the bank.
3. No one from Tankworks was on site during excavation.
4. The excavation crew didn’t have instructions on the order of work.
5. A tractor hooked the supply line from the above-ground tank, stretching the line until it broke.
6. The excavation crew left the site on Friday with the fuel line broken.
7. By Monday morning, fuel oil had puddled around the house to the front yard, flooding a swale by Thrall Avenue.

The bank paid $60,000 for cleanup and sued Tankworks for reimbursement. Last month, a Connecticut court awarded the bank $60,000 for negligence (2017 Conn. Super. LEXIS 3581) plus the bank’s attorney fees. That’s unusual. An award of attorney fees is rare in tort cases. But there was a reason.

Any violation of Connecticut’s Home Improvement Act is an “unfair or deceptive trade practice,” qualifying the plaintiff for an award of attorney fees. By using a lame home improvement contract, Tankworks opened the door to an award of plaintiff’s legal fees – perhaps several times cost of the cleanup.

A Prime Contract and a Subcontract

I’m not going to comment on the mistakes listed above. You be the judge on these. But there’s one point you shouldn’t miss: two good contracts could have saved this job.

First, a legal Connecticut home improvement contract with the bank would have insulated Tankworks against a claim for the bank’s attorney fees. Without a valid home improvement contract, Tankworks had no defense against the bank’s claim of an unfair trade practice.

Second, excavation on this job was done by Red Door Construction, a subcontractor to Tankworks. That should not be a surprise. Many residential contractors use an excavation sub. But a good subcontract could have: (1) made Red Door liable for their own negligence, (2) required Red Door to carry liability insurance and (3) indemnified Tankworks for any loss due to negligence of Red Door.

Don’t make a Tankworks mistake. ConstructionContract Writer drafts letter-perfect contracts and subcontracts that comply precisely with state law -- and protect you when a good job goes bad.

 

Is This How You Do Business?

Chris Chase runs Chase Building Movers, Inc. in Wells, Maine. Chase specializes in timber frame barn moving and restoration. In May of 2011, Chris responded to an ad Ken and Nancy Lavin placed on Craig’s List. The Lavins needed a contractor to repair a timber-frame barn behind their home. On May 5, 2011, Chris met with Nancy Lavin on site to discuss the project.

Rot was plainly visible on the barn’s north wall. Chris pulled off several rotted shingles to get a closer look. He drew a rough sketch of the barn footprint and made a note, "Replace 6” x 6” sill with p.t." and "Replace studs as needed."

Chris offered to do the work at $45 per hour, his standard rate. Nancy agreed to provide the materials. Chris didn’t say anything about a written contract but agreed to start work when the barn was cleaned out and when Nancy had a building permit. That didn’t happen for over a year.

In October 2012, Nancy went to the Wells town hall to get her permit. She described the job as: "Replace 37 linear feet of existing garage wall and sill plates to match original. Total of 370 Sq. Ft." The value of the work was pegged at $10,000.

Chris had a crew working on site from October 18 to October 26, 2012. Nancy was there nearly every day and took pictures. After work started, Chris discovered that the sill under the west wall was also rotted. According to Chris, Nancy gave her OK to repair the west wall. Again, there was no written agreement for extra work.

By the following Monday, work was substantially complete. Chris presented Nancy with a bill for $8,460 -- 188 hours of work at $45 per hour. Nancy was surprised at the size of the bill. She wrote Chris a check for $5,000 and refused to pay any more. That left $3,460 unpaid.

Lavin vs. Chase Building Movers

Ken and Nancy sued, claiming breach of contract, breach of warranty, fraud, and violation of Maine’s Home Construction Contract Act. The Act requires a written agreement with 14 separate notices and disclosures. All changes to the contract must be in writing. Chris admitted at trial that he violated Maine’s HCCA. Under Maine’s Unfair Trade Practices Act, any violation of the HCCA is prima facie evidence of fraud. That gave Ken and Nancy the right to collect damages plus attorney's fees and costs. The cost to Chris could be many thousands of dollars – all because Chris didn’t bother to get a signed contract.

The case came to trial on April 12, 2017. Expert testimony convinced judge Douglas that work on the barn was structurally sound and substantially complete. He awarded Chris $2,520 of the $3,460 Chase Building Movers claimed and denied all claims of the Lavins. Chris wasn’t charged any of the $1,000 civil penalty that comes with violation of Maine’s HCCA.

Chris got off easy. Still, it took nearly five years to collect. Chris paid attorney's fees for much of that time, including the two-day trial. In the end, Chris got paid less than 90% of what he expected. 

No contractor wants results like that.

If you’re still working without written contracts, understand that times have changed. Modern consumer protection law in nearly all states puts residential contractors at a disadvantage. Without a signed agreement, you’re wide open to what happened to Chase Building Movers.

With Construction Contract Writer, it’s easy to draft contracts perfectly legal in any state and for any type of construction. The trial version is free.

 

Changes in Indiana Contract Law

Residential contractors in Indiana can trash their old contracts effective June 30, 2017. On July 1, Indiana’s old Home Improvement Act is replaced by Indiana’s Real Property Improvement Act (Indiana Code Annotated § 24-5-11-1 to § 24-5-11-14) To have a legal agreement after 7/1/17, residential contractors in Indiana have to make some changes:

1. Work formerly classified as home improvement is now real property improvement.
2. A written contract is now required for every interior or exterior improvement on residences with four units or less: new construction, alteration, replacement, reconstruction or repair, including work done to a basement.
3. The 3-day cancellation notice has to change. Owners now have three days to cancel after the later of either (A) both the owner and the contractor signing the agreement or (B) a final written determination of insurance coverage for any claim of loss.
4. Use of Email: The contract must include the email address of both the contractor and someone who will respond to inquiries from the owner. An owner can cancel the job by email.

Several new statements are now required in the contract:

• The contractor, subs and suppliers are prohibited from making a claim against the owner’s insurance company.
• The contract is conditional until all licenses and permits have been granted.
• Disclosure that the project will require labor, materials or equipment from third-party subs or suppliers.
• The full contract price (less any discounts offered) has to appear in the agreement.

How important are these changes? You decide. An agreement that violates the new Real Property Improvement Contracts Act gives an owner the right to collect damages up to $500. For a willful deceptive act, an Indiana court can award an owner three times actual damages or $1,000, whichever is greater, plus attorney fees.

Why all these changes?

The answer begins with a November 2010 audit of sales tax collected by Lowes Home Centers. The Indiana Dept. of State Revenue discovered that Lowes was charging sales tax on their home improvement contracts based on the wholesale cost of materials to Lowes, not the retail price of materials sold at Lowes outlets.

The Indiana Dept. of State Revenue objected and issued an assessment against Lowes. Lowes appealed that assessment and won in the Indiana Tax Court. The court’s December 2014 decision: Indiana’s Dept. of State Revenue didn’t have authority to equate Lowes time and material home improvement contracts with lump sum real property improvement contracts on which sales tax was due on the full retail cost of materials. That decision gave Lowes an advantage over residential contractors across the state. Lowes could charge their customers less sales tax! As you might expect, the advantage didn’t last long.

Indiana Senate Bill 353, signed by Governor Holcomb on April 25, 2017, re-set the balance. Under the new Real Property Improvement Act, Lowes and every residential contractor in the state is labeled a real property improvement supplier. That part of the Act was made retroactive back to 2010. All have to pay sales tax on the retail price of materials -- a clear victory for the Indiana Dept. of State Revenue. But other parts of the Act make obsolete nearly every residential agreement used by Indiana contractors.

If you need contracts that comply with Indiana’s new Real Property Improvement Act, have a look at Construction ContractWriter. The trial version is free.

Can I Use My Contract Across State Lines?

“My company is based in Kansas. But I build in Missouri too. Can I use my KS contract on construction projects in MO?”

Good question. The answer is “No.” But it takes some explaining.

Contract law lets people decide where and how disputes will be settled – which court (the forum) and which state law (choice of law) will apply. If the contract makes reasonable decisions on forum and choice of law, courts will usually enforce the agreement as written. For example, the following would usually be a good choice: the state where the contract was signed or where goods were delivered or the home state of the vendor. On that basis, a Kansas contractor could use Kansas contracts on Missouri jobs. But keep reading. Construction contract law is different.

Most states require that disputes about construction in that state be settled by a state court applying law of that state. Twenty-six states fall in this “home rule” category: AZ, CA, CT, FL, IL, IN, KS, LA, MN, MT, NC, NE, NM, NV, NY, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, and WI. In those states, decisions about forum and choice of law are made for you. Anything to the contrary in your contract is a waste of time.

“OK,” you say. “But MO isn’t on that list of 26 states. Doesn’t that mean my KS contract will work in Missouri?”

The answer is still “No.”

Most of the other 24 states, including Missouri, follow § 187(2) of the Restatement (Second) of Conflict of Laws, "The law of the state chosen by the parties to govern their contractual rights and duties will be applied...unless...(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue." Following that logic, no Missouri court has ever applied the law of another state to resolve a dispute about construction in Missouri.

“Fine. But I’m not trying to use Kansas law or Kansas courts to settle disputes on my Missouri jobs. I just want to use the same basic contract on all my jobs. Can I do that?”

Again, the answer is “No.”

Every state requires very specific notices and disclosures in construction contracts. Nothing in your contract about forum or choice of law is going to change the law at your construction site.

If your Kansas contract is legal, it includes several of these KS notices. All will be worthless on a Missouri job. For example, the notice required by the Kansas Residential Construction Defect Act does nothing on a job in Missouri. Terms required by the Kansas Fairness in Private Construction Contract Act are irrelevant in Missouri. The arbitration notice required by Kansas law is rubbish in a contract for construction in Missouri.

Worse, your transplanted Kansas contract won’t have notices required for construction in Missouri. For example, if any part of the work will be covered by insurance, the contract has to include disclosures required by Missouri Statutes § 407.725. Lien rights may be forfeit if the owner doesn’t get the notice required by Missouri Statutes § 429.012. Omit the notice required by Missouri’s Right to Repair Act and you lose the right to inspect any claimed defect and make repairs.

Other Examples

I’ve been talking about MO and KS. But you’ll have nearly the same problem in any pair of states. Take this to the bank: Contracts have to comply with law at the construction site. And construction contract law is different every state.

If you handle jobs in two or more states, there’s an easy answer. Construction Contract Writer drafts perfectly legal agreements for any state you select. The single-state version is $119. Or get CCW for all 50 states for $299. The trial version of either is free.

Once the 50-states version of CCW is installed on your computer, try this: Change the construction site address in any contract to a different state. The agreement morphs into a contract perfectly legal in the state just selected.

So, I guess the answer to the first question above is a qualified “Yes.” With Construction Contract Writer, you can make essentially the same construction contract work in every state.

 

More Trouble for Tomi Akins

You may have heard the name Titilayo Akinyoyenu. "Tomi Akins,” as he’s known, is a Washington DC pharmacist facing federal charges of selling meds online to some 38,000 people without legitimate prescriptions. According to the US attorney, Tomi’s online sales netted $8.3 million. But the federal charges aren’t Tomi’s only problem. He got more bad news last week – in a dispute with his construction contractor. Here’s the story.

Back in 2011 Tomi signed a contract with Keswick Homes to build a $1,500,000 home on a one-acre lot in the Avenel neighborhood in Montgomery County, Maryland. The contract price was later increased by several written change orders. Before Tomi moved in, Keswick presented a bill for an additional $477,000 for site work -- engineering, soil testing, imported soil, a storm water-management system and 400 feet of 8’ to 16’ high retaining wall. Tomi refused to pay, claiming he never signed a change order for that work. Section § 10-505(3) of Maryland’s Custom Home Protection Act requires that new home contracts:

Expressly state that any and all changes that are to be made to the contract shall be recorded as "change orders" that specify the change in the work ordered and the effect of the change on the price of the house;

Keswick’s contract did that. But an addendum to the contract treated site work as an allowance. Keswick was to “manage, coordinate, and process payments to contractors upon completion of their work” and “submit accounting of all paid invoices at final draw with allowance to be adjusted to final cost at final change order.” In essence, the change order for site work was for an amount to be determined on completion. Did that comply with Maryland law?

The trial court ruled that it did. The jury awarded Keswick the full $477,000. Tomi appealed, contending a change order for work to be determined at price not stated was a violation of Maryland’s Custom Home Protection Act.

Last week the appellate court (2017 Md. App. LEXIS 233) agreed with Tomi. The change order for site work was void. But the appellate court didn't stop there. Under Maryland law, a void change order does not make the contract unenforceable absent proof that the owners were actually injured by the violation. In this case, Tomi didn’t prove an injury. “Consequently, the owners were not entitled to a judgment in their favor on the builder's claims. Instead, the court was entitled to submit the builder's claims to the jury, which found against the owners.”

So Keswick will collect the $477,000. The appellate court also reversed the trial court’s denial of attorney fees. Keswick is entitled to claim reimbursement for their $266,520 in attorney fees. As we said, it was a bad week for Tomi Akins.

So Can I Ignore Maryland Law on Change Orders?

Not recommended. Keswick won the case – but at a high price. Getting a signed change order is always easier than explaining why you didn’t get a signed order. 

But, you ask, “How can I quote a price on site work when I don’t know what’s needed?” That’s easy. And it works in all states that require a contract price in dollars and cents. Quote a Guaranteed Maximum Price (GMP) for the change order and then agree to split any savings with the owner. That’s essentially the same as a cost-plus contract but complies fully with state law. If you need help drafting a GPM contract, have a look at Construction Contract Writer. The trial version is free.

 

Who Should Sign the Contract?

Every construction contractor can tell a story about working for a demanding, indecisive or argumentative property owner. But what you don't know about an owner could be far worse. A case decided in Washington DC this week illustrates the point.

Winmar Construction agreed with Restaurants America to convert leased space in a large office building at 700 6th Street, NW, Washington, DC to use as a restaurant. Work on the $1,024,824 project proceeded until May 10, 2013 when Restaurants America fell behind in their payments. Winmar was owed $575,732 and elected to sue to collect. Now, Winmar had a problem. Who, exactly, was Restaurants America, the project owner?

As it turned out, Restaurants America was a short name for Restaurants America Consulting Group, Inc., ("RACGI"), an Illinois corporation. Roger Greenfield was the sole shareholder, director, President, Secretary, and Treasurer. But Greenfield hadn’t signed the agreement with Winmar. Instead, Theodore Kasemir had signed on behalf of Restaurants America, a company that didn’t actually exist at the time.

Winmar sued in Washington DC superior court. When RACGI did not file a response, the court gave Winmar a default judgment for the full $575,732. To begin collection, Winmar registered the judgment in Cook County, Illinois, superior court where RACGI was incorporated. But RACGI didn’t have assets in Illinois. That should not have been a surprise. RACGI had been capitalized at $1,000, only enough to pay the filing fee for a new Illinois corporation. So Winmar filed a motion to hold Greenfield and Kasemir personally liable for the Washington, DC judgment.

Good idea. But the Illinois court didn’t agree. To collect from Greenfield and Kasemir, the court ruled Winmar would have to sue Greenfield and Kasemir. So, that was Winmar’s next step, filing suit in Illinois.

This time, the defendants filed an answer, insisting that the case be bounced back to Washington, DC, the place where work was done. The Illinois court agreed. So over a year and a half after work stopped, the case was back in Washington, DC, this time in U.S. District Court.

Now, the defendants filed for summary judgment, claiming they had no obligation to pay Winmar for the work. Greenfield and Kasemir didn’t have a contract with Winmar. Greenfield was only a consultant. The contract should have been with the building tenant, Townhouse DC, LLC, not the consultants. Anyhow, Winmar had already won the suit against RACGI. If the superior court agreed that the contract was with RACGI, how could Winmar now claim that the contract was with Greenfield and Kasemir?

The court wasn’t persuaded, ruling (2017 U.S. Dist. LEXIS 14869) on February 2 that the case could proceed. Winmar will have another chance to prove who owes the $575,732.

Don’t Make Winmar’s Mistake

Stay out of any “hide the owner” shell game. Your county assessor’s web site should settle any question about property ownership. If the property is owned by individuals, such as a husband and wife, both should sign your contract. If the owner is a corporation, an officer or director should sign for the corporation. If an LLC, ask a manager to sign. But check with your secretary of state to be sure the corporation or LLC really exists. If a partnership, any partner has authority to sign your contract. If the property is owned by a trust, the trustee can sign. 

If the property is leased, be sure the owner knows about your project. You may not have lien rights against leased property. If you’re doing work for an unincorporated association, such as on the common area of a condominium, the owners’ association is your client. Be sure the association manager has authority to contract for the work. A resolution by the board of directors is your best evidence of that. In every case, be sure the project owner has resources to pay your bill. A copy of a loan commitment, tax return or financial statement will settle that issue.

No matter the type of work or the location, your best resource for drafting construction contracts is Construction Contract Writer. The trial version is free.

Contract Termination Your Way

Earlier this month I got a question from a construction contractor negotiating a deal with the owner’s attorney. The attorney wanted a termination clause in the agreement. The contractor wanted the job but didn’t want to give his client the right to back out of the deal once work started.

“Why even have a contract if the owner can terminate the job any time he wants?”

Good question. But there’s a good answer. First, a few basics.

There are two types of termination in construction contracts. Type one is termination for cause. For example, repeated failure to correct defects could be grounds to terminate for cause. That’s not what the attorney in this case wanted. He wanted the right to terminate at any time for “convenience of the owner.” That means for any reason at all – or even no reason at all. I know that sounds horrible to most contractors. But stay with me.

Termination for convenience clauses are very common on larger jobs. Public works contracts usually give government the right to terminate for convenience. After all, governments are political organizations supported by taxpayers. Politicians come and go. Taxpayers can be fickle. A new mayor or governor or agency head may have different priorities. Governments need some legal way to revoke commitments made by deposed politicians.

Even contracts for larger private projects commonly give owners the right to terminate at will. For example, Section 14.4 of A.I.A. contract form 101 allows an owner “terminate the contract for convenience and without cause.” Again, you can think of many reasons why an owner might have to terminate. Maybe a lender defaulted on a loan commitment. Or maybe rock discovered on site makes the cost of work prohibitive.

Make Termination Work for You

So, let’s assume your contract will include a clause allowing termination for convenience of the owner. Now what? That’s easy. It’s time to do some contract drafting. On termination, you collect:

• For all work completed, including labor, material, overhead and profit.
• Overhead and profit on the portion of the job not yet completed.
• For all charges imposed by subs, suppliers and others that result from termination.

Then, be sure your contract includes protective language. Termination for convenience:

• Must be in writing and must show an effective date.
• Constitutes a waiver of any breach by the contractor.
• Is acceptance of work done to that date.
• Relieves the contractor of further responsibility under the agreement.
• Requires payment in full within 30 days after contractor submits an invoice.
• Any partial termination must describe the work being terminated.
• Changes in the job require a change order, not a partial termination.

With those clauses in your agreement, what contractor wouldn’t be willing to turn the job over to others? I’m not suggesting that, of course. Contractors thrive on building a reputation for professional work and a list of satisfied clients. But if the job turns sour, it’s better to walk away with a good financial settlement.

Where can you get help with contract drafting like this? That’s easy. Construction Contract Writer covers all the bases: Have a look at the trial version. It’s free. Then you decide what fits best in your agreements. Termination by either the owner or the contractor and either for cause or for convenience. It’s your call.