Construction Management Contracting in Montana

Dr. Gary Jystad practiced family medicine and surgery for over 50 years in Montana. In 1991, he built a log home on Flathead Lake in Rollins, MT, the “dream home” of his wife Mary Ellen. A tragic fire in 2016 devastated the main building, leaving the garage and guest house damaged but not destroyed.

In February 2017, Dr. Jystad signed a contract with Flathead Management Partners (FMP) to oversee reconstruction. FMP agreed to “coordinate and facilitate” remediation and “work at the exclusive direction of Dr. Jystad”. FMP didn’t plan to do any work with FMP crews.

Under the contract, FMP would:

• Assist Dr. Jystad in selecting an appropriate design,
• Select and contract with a general contractor to execute that work,
• Supervise & coordinate the work and logistics of designers, contractors, vendors, permits and . . . all else necessary to complete the agreed upon scope of work in a timely manner and within an agreed upon budget.

If you’ve been in construction for a while, you probably recognize this as a fixed-price construction management (CM) contract.

Work got off to a good start. FMP and Dr. Jystad worked well together. FMP pulled the permits and helped Dr. Jystad select a general contractor. Work started on the main house. But on June 10, 2017 there was a falling out. Dr. Jystad, his son Robert and his daughter Sharon met with FMP. The meeting didn’t go well. At the end of the conference, FMP was told that their contract was "null and void and terminated." That didn’t set well with FMP. They stopped work and filed a construction lien. Later FMP filed suit against Dr. Jystad, asking foreclosure of their lien and claiming damages for breach of contract.

To his point, it was a simple contract dispute. When an owner breaches an agreement, the contractor is entitled to damages, usually loss of profit. In this case, FMP claimed those profits would have been $191,876. And that was the award of the trial court.

In the Montana Supreme Court

Dr. Jystad’s appeal made a simple point. The contract with FMP was not enforceable under Montana Code § 28-2-2201. Since April of 2009, Montana contracts for construction of a new residence “between a general contractor and an owner” have to disclose in writing:

• The contractor’s liability and workers’ comp coverage,
• The billing cycle and payment schedule,
• How change orders will be handled,
• A schedule of inspections and tests,
• That the owner can pay for other tests and inspections;
• The general contractor’s one-year warranty.

FMP’s contract covered none of this. And the Montana Supreme Court has already ruled that an oral contract for construction of a new home that lacked these disclosures was void under § 28-2-2201.

You Decide

Was FMP a general contractor under Montana law? If so, FMP’s award of $191,876 gets wiped out.

Before you decide, consider this. Several states have wrestled with this issue: Is a construction management contractor like FMP a “construction contractor” under state law? Or was FMP just a consultant?

This isn’t a trivial issue. There’s plenty at stake here. Construction management contracting (consulting) is now big business, and for good reason. Most states require that general contractors be either registered or licensed. Consultants need only a business license.

Two states have weighed in on this issue:

Since January 2014, California Business & Professions Code § 7026.1 has made it clear. Anyone who bids construction work or manages construction projects is a “contractor” and has to be licensed.

Just last week, a Louisiana appellate court decided that a “job coordinator” on a residential project was required to meet warranty standards imposed on general contractors in Louisiana. (Palermo v. Homes & More, Inc.)

Expect other states to resolve this issue in the next few years. My guess is that nearly all states will decide that CM consultants are “general contractors” and carry all the burdens and benefits that go with the title.

So, what did the Montana Supreme Court decide? Under Montana law, a construction management contractor is not a “general contractor” and doesn’t have to comply with § 28-2-2201. FMP gets to keep their $191,876. (Flathead Management Partners v. Jystad, decided December 17, 2019).

My advice: Don’t expect the FMP v. Jystad decision to stand for very long. It opens a gaping loophole in Montana construction contracting law. The Montana legislature is likely to consider a change to § 28-2-2201 at the next session. To be safe, give the notices required of construction contractors, even if all you do is consulting. Staying legal is quick and easy with Montana Construction Contract Writer. The trial version is free.

If you’re new to construction management contracting, Paper Contracting by Mitchell & Moselle is the best hands-on guide available.

Construction Law Changes in New York and Texas

If you work in either New York or Texas, keep reading. Changes in the law are going to affect how you do business.

First, New York

As I write these words (November 23, 2019), New York Governor Andrew Cuomo is about to sign S.B. 1405, the “storm chaser” bill. There’s no organized opposition to the bill. So, you can assume the bill will go into effect by June 2020.

What’s in the new law? Roofing, siding and waterproofing contracts have to be in writing and must show the name of the roofer’s liability and worker’s comp carriers. Policy limits are $100,000/$300,000 for liability and either workers’ comp coverage or a Certificate of Exemption from the Workers' Comp Board.

No payment on the contract is allowed until materials are on site.

For insured losses:

• Roofing contractors can’t offer to cover any portion of the deductible.
• The owner has three business days to cancel the contract after being informed that any part of the loss is not covered by insurance.
• Emergency work is exempted if the owner furnishes a dated and signed hand-written statement of the emergency and waives the right to cancel.
• Roofers aren’t allowed to negotiate settlement of claims or receive a fee for referral to a claims negotiator.

Failure to comply with this new law bars suit on the contract.

Now to Texas

The new law is similar in some respects to the New York law but covers all insured losses, not just residential roofing. Business and Commerce Code § 2702 became effective September 1, 2019.

Any repair job for $1,000 or more that’s covered at least in part by insurance has to a include a detailed notice in 12-point type:

Texas law requires a person insured under a property insurance policy to pay any deductible applicable to a claim made under the policy. It is a violation of Texas law for a seller of goods or services who reasonably expects to be paid wholly or partly from the proceeds of a property insurance claim to knowingly allow the insured person to fail to pay, or assist the insured person’s failure to pay, the applicable insurance deductible.

It's a Class B misdemeanor (six months in jail) to either (1) omit the contract notice or (2) offer to reimburse the owner’s deductible.

20 States

With the addition of New York and Texas, 20 states now place some form of restriction on contracts for insurance repair work: AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI and WV. The laws are technical and change every year. No matter the type of work or where you build, Construction Contract Writer will draft letter-perfect contracts that comply exactly with the law in your state. The trial version is free.

3-Day Cancellation -- State vs. Federal Notices

“If I give my state’s 3-day cancellation notice, do I also have to give the federal 3-day notice?”

A simple question. And a good one. But the answer gets complex.

Here’s the easy part. The federal 3-day cancellation notice is always required when any improvement to a primary residence will create a lien on that property. Since all states grant mechanics' lien rights for improvements to private property, the federal cancellation notice is always required. But note the word primary. The federal notice is not required on a secondary residence, such as a vacation home.

Now, let’s talk about state cancellation notices. Nearly all states require a 3-day cancellation notice when home improvement services are sold at the project site. That’s a home solicitation sale. But thirty-one states waive their state 3-day home solicitation notice if the contract includes the federal 3-day home improvement notice. So, in those thirty-one states, no state notice is required if you give the federal notice.

Caution: Be careful in these 31 states when work is not on the primary residence of your client. The state notice may be required even if the federal notice is not. Note also that wording of the notice varies from state to state.

Law is different in the remaining 20 states (including the District of Columbia):

Fourteen states (FL, GA, HI, IN, MI, MO, NH, NJ, NY, ND, OK, VT, WV and WY) waive their 3-day home solicitation notice if the deal is signed at the office of the seller or if the sale started with an invitation from the owner. I call this the big box store exception. This is why most Home Depot and Lowes home improvement contracts skip their state cancellation notice but include the federal notice.

Rules vary in the other states:

• Alaska requires a 5-day notice unless the deal was initiated by the owner.
• Connecticut always requires the state notice.
• District of Columbia never requires a home solicitation sales notice.
• Texas waives the state notice if the contract includes the 3-day notice required by the Federal Door-to-Door Sales Act. Since the federal door-to-door notice isn’t required when a federal 3-day home improvement notice is in a contract, Texas home improvement contracts need both the Texas home solicitation notice and the federal home improvement notice.
• Washington requires a state cancellation notice only on roofing and siding jobs.

Now the fine points

Federal law considers Saturdays a business day. So, an owner who signs a home improvement contract on Friday has until midnight the following Tuesday to cancel. Most state laws don’t count either Saturday or Sunday as business days. The same owner would have until midnight the following Wednesday to cancel if the state notice is required. This is an important distinction. Contractors have to write on the cancellation form the last day the contract can be rescinded.

An entirely different set of rules apply if you offer a credit term or recommend a lender. Better to leave the lending to others.

Eighteen states (AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, OK, SC, SD, TN, UT, WI, WV) have different 3-day cancellation rules if any part of the cost will be covered by insurance.

In an emergency, the owner can waive the right to cancel under federal law. Some states offer the same option. But you still have to deliver the 3-day cancellation notice.

Finally, be aware that the penalty for a faulty 3-day notice is severe. Under federal law, the owner has three years to bring suit for a refund. Many states label it “consumer fraud” when a contractor omits the state cancellation notice.

If all this has your head swimming, don’t worry. Construction Contract Writer sorts out all the details. With CCW, you’ll write letter-perfect contracts that comply with both state and federal law every time. The trial version is free.

Buyer’s Remorse

Every residential contractor can think of a dozen good reasons to have written contracts. Last week, a Wisconsin appellate court piled on still one more reason. I’ll explain.

In the winter of 2014, Pat and David Sandlund were thinking about improvements to their home in Door County, Wisconsin. If you’re not familiar with Wisconsin geography, Door County is north of Green Bay on a peninsula that extends into Lake Michigan. Winters are cold in Door County. And that’s part of our story.

In the spring of 2015, Pat and David talked with Progressive Carpentry about replacing the windows and shingle roof on their home. Rich Birnschein and his son run Progressive Carpentry. Both Birnscheins met with David at the Sandlunds' home on July 22. According to Rich, Dave gave Progressive the go-ahead to order shingles and Andersen replacement windows. While at the Sandlund home, the Birnscheins took measurements for the windows and a sliding glass door. Later Dave and the Birnscheins met at a building supply warehouse to select the exact window style. Progressive placed the window order in August, 2015.

The first thing to know about replacement windows is that they’re custom-made. All have to fit precisely in an existing wall opening. Even the dual-pane insulating glass is custom made. A second point about replacement windows should be obvious. They’re not cheap. Custom replacement windows and doors for a 4-bedroom home can run $40,000 or more.

Two weeks after ordering the windows, Progressive sent Dave Sandlund an email with some news.  The shingles had arrived. Dave replied with more news. He had a change of heart:

The kids think I am nuts to spend that much on the house at this stage of our lives ... The kids are now looking for someplace for us to move to warm and easier living ... I must admit this whole process has gotten me to thinking about just selling and moving on. I love it up here but maybe it is time for us to move on. Naturally I am not going to let you get stuck with any material costs that you have incurred but no decision has been made yet.

Birnschein tried to salvage the project. But the Sandlunds wouldn’t budge – and wouldn’t pay for the windows. Birnschein filed suit.

At trial, an attorney for the Sandlunds had powerful arguments:

• There was no contract. Wisconsin’s Home Improvement Practices Act, Wis. Admin. Code § ATCP 110 requires a written contract for home improvement work. Oral agreements in violation of the law are said to be unenforceable against the owner.
• The Sandlunds didn’t authorize the order. Again, there was nothing in writing. Progressive was stuck with the windows.
• There was no building permit. Work never got beyond planning and ordering materials.

What the Court Decided

The court sided with Progressive.The Sandlunds authorized Birnschein to buy the windows. The Sandlunds and Progressive had an oral contract. “It is a grave error to assert that all contracts in violation of a statute are unenforceable.”

This case is a prime example of buyer's remorse . . . [The Sandlunds] intended to have [Birnschein] do additional remodeling work on their home and authorized him to order the windows and shingles. When [the Sandlunds] procrastinated long enough into September and [Birnschein] then told them he couldn't get to their project until the spring of 2016. . . [the Sandlunds] got angry and then had someone else do the work.

The court awarded Progressive reimbursement for the windows -- but not their loss of profit. If Progressive had a written agreement, as required by Wisconsin law, the result could have been very different. Progressive would have collected for the windows, loss of profit plus attorney fees.

With a written contract, buyer’s remorse won’t affect your jobs. Construction Contract Writer makes it easy to put it in writing, no matter where you build and no matter the type of project.

Who Pays for Mistakes

You’ve been here before. Every contractor has.

Something doesn’t pass inspection. It’s clearly wrong. Work has to be torn out and re-done. The question is, “Who pays?” Was it the fault of the prime? Or the sub? Or the architect or engineer?

The Easy Case

If the approved plans and specs are clear and work wasn’t done as prescribed, it’s the contractor’s mistake. No question. Case closed.

But what if the plans and specs aren’t clear? Or are clearly in conflict? For example, suppose the plans show studs 16” o.c. and the specs call out 24” o.c. A mistake like that drops us into what lawyers call precedence of the documents. Some construction contracts go on and on about which prevails if there’s a conflict between plans, specs, industry standards, etc. Logic dictates that precedence favor what was truly intended, assuming anyone actually considered the issue. For example, handwritten notes and change orders should get precedence over either plans or specs.

What if the plans and specs are mute on some point? That’s a tougher case. Is it the designer’s fault? True, architects and engineers have been found liable for simple omissions. But don’t expect either to cover the cost of ambiguity in the plans. The cost of fixing what’s broken usually falls on contractors and subs. It’s a risk inherent in the construction process.

Obviously, there’s a good way to stay out of trouble. If the plans and specs aren’t clear, if you aren’t sure what the code requires, if something doesn’t seem right, start asking questions. Don’t assume. Don’t let anyone pick up tools while there’s doubt about the finished product.

Courts usually put it this way: A contractor has an implied duty to give notice when something either isn’t clear or seems defective. A leading case on this is Rubin v. Coles, decided in New York in 1931. The addition to a brick building in Flatbush was subsiding. The building department cited the owner. Eventually the contractor was called to account. His defense was perfect. The foundation complied exactly with the plans. According to Judge Geismar, that wasn’t enough. Most of Flatbush is built on filled soil. The contractor, not the designer, is the man on the spot, put there to use his training and experience to either correct plans or at least give warning of the defect.

It has been repeatedly held that, even though he be bound to follow fixed plans and specifications, the contractor owes the duty to examine such plans and judge of their sufficiency; that he is bound to discover defects that are reasonably discoverable or patent; and where he knows or had reason to believe that the plans are defective, and follows them without pointing out such defects to the owner or architect, he is not entitled to recover if the building proves insufficient because of such defects.

Now the Hard Part

Notice the words, “that he is bound to discover defects that are reasonably discoverable or patent.” In Rubin v. Coles, the plans were silent on depth of the foundation. “It was, therefore, the duty of the contractors to construct it upon solid ground so as to produce a level structure, even though it might have been necessary to make greater excavation or more substantial fill."

Decide for yourself. Is that a reasonable standard? Should contractors make design decisions when something seems out of place? I’m not convinced. Fortunately, there’s an easy way to put risk of design flaws back where it belongs, on the owner or design professional. Write two points into your contracts: The contractor has no obligation to either (1) detect design errors or (2) amend dimensions and descriptions in the plans.

Construction Contract Writer makes it easy to draft agreements like that. Mistakes don’t have to add to your cost. The trial version is free.

A 30-Year Roof

Tom and Sophie Broadley needed a new roof on their Fairfield, CT home. Lucas Papageorge of LCP General Contractors offered a contract to remove the existing roof and install “30-year architectural roofing, plywood and gutters" at a price of $11,950. Tom signed the contract. That was April 17, 2010.

LCP got a permit from the Town of Fairfield and did the work. When finished, LCP called for final inspection. The Fairfield building inspector signed off on the job. LCP collected in full.

So what’s wrong with that?

Plenty, as it turns out. Eight years later, the Broadleys sued LCP for $11,262 plus attorney fees, claiming their 30-year roof should have kept water out for 30 years. It didn’t.

The first 4 or 5 years were OK. No leaks. But in 2014 or 2015, the Broadleys noticed water dripping from the ceiling in their first floor living room. They called Papageorge at LCP. After several hours working with a water hose, he found what he thought was the problem. The next day, Papageorge applied silicone caulk at the joint between the wall and the roof line. Apparently, windblown rain was getting under the roof overhang. Aluminum flashing at the top of the wall wasn't keeping rain out.

About 8 months later, Papageorge got another call. Broadley said there was another leak. Again, Papageorge went to work with a garden hose and found another problem area. Apron flashing was covered by multiple layers of siding. Papageorge applied tape flashing over the existing aluminum flashing.

After the next rain, Papageorge was called back a third time. A leak had done several thousand dollars in damage to the living room ceiling. Papageorge admitted the tape flashing didn’t help. But he insisted the problem wasn’t the roof. It was the flashing. The April 17, 2010 contract called for re-roofing, not replacement of any flashing. Still, Papageorge made one last 'Hail Mary' effort, spraying foam between the roof and the siding.

In all, Papageorge spent more than fifteen hours trying to stop leaks. Broadley wasn’t satisfied. He hired another contractor to replace the roof – this time with lead counterflashing around the chimney. Then Broadley filed suit against LCP General Contractors, claiming a 30-year roof should keep water out for 30 years. That was May, 2017.

The April 17, 2010 contract didn't say who guaranteed what and for how long. Even a sentence or two would have settled the issue. But that contract was mum on warranty. So the lawyers had to slug it out for two years -- at a cost that must have far exceeded the cost of the roof. 

At Trial

The only evidence supporting a 30-year warranty was in the project description. Plaintiffs considered that description a pledge by Papageorge that the new roof would not leak for 30 years. Counsel for Papageorge argued that “30-year roof” is only the manufacturer's quality rating, a way to distinguish one grade of roofing shingles from another.

Both the trial court and the appellate court found for the defendant. There was no evidence that the roof Papageorge installed was substandard. LCP’s only responsibility for flashing was to make an inspection and inform the owner if flashing had to be replaced. Papageorge checked the flashing and found it “in good shape”. Nothing more was required.

What’s Wrong Here?

It’s easy to avoid problems like this. Every good construction contract includes a section on warranty – what’s covered, for how long, what’s excluded. Most important, the contract should identify warranties offered by the manufacturer as the responsibility of the manufacturer, not the installing contractor. The installer’s only obligation is to pass on the manufacturer’s warranty. The contract in Broadley v. Papageorge could have made that clear.

Every state sets standards for construction warranty. Some warranties are required by state law. Others are optional. Many can be waived (excluded) if you use the right contract language. If your contracts don’t cover warranty, you’re missing an opportunity to avoid problems. Have a look at Construction Contract Writer. The trial version is free.

Bad Faith Contracting

Dominick Vivona has a home in a wooded area near Greenwich, Connecticut. In June of 2017, he set out to build a treehouse for his kids. Vivona sketched a design and found an experienced carpenter, Walter Reyes, to do the work for $6,000.

Reyes drew plans for the job, pulled the permit and bought most of the materials. Reyes wanted to be paid 35% on the second day of work, 30% on the fourth day of work and 35% when the job was finished. None of this was in writing.

If you read my blog post last month, you know where this case is headed. Last month I described how a Connecticut contractor couldn’t collect the final $8,000 on a roofing job because the written contract was lame. In fact, the agreement was so bad that the contractor had his mechanics lien rights wiped out.

The contract in this treehouse case, Reyes v. Vivona, was worse still -- no written contract at all, just an exchange of text messages, several discussions and Vivona’s paper sketches.

Both cases were decided under Connecticut law and at essentially the same time. But the outcome of the two cases is different. This time the contractor won. I’ll explain.

The treehouse job didn’t go exactly as planned. Work started on Monday. Placing support beams between two trees took all day. On Tuesday, Reyes and his crew did most of the framing and flooring. No work was done on Wednesday. On Thursday, Reyes and his crew framed the roof, doors and windows. Friday was the fourth work day. Reyes started framing the second story of the treehouse, including a loft sleeping area. By the afternoon of the fourth day, Reyes believed he had finished 65% of the job but still had not been paid. Reyes asked Vivona for $3,500 on account. Vivona offered to pay only $2,000. After some discussion, they compromised on $3,000. Vivona wrote the check and Reyes agreed to continue work the following day, Saturday.

Later on Friday, Reyes called Vivona, asking for payment at the end of each day for work done that day. That led to a dispute which ended in Vivona ordering Reyes off the site. Reyes returned to the site later with a police escort to pick up his tools. The next day, Vivona stopped payment on the $3,000 check.

At that point, Reyes had nothing for his four days of work. Now, the question. Isn’t that what Connecticut Home Improvement contract law requires? From Tanius v. Villwell Builders we know that Connecticut contractors who do home improvement work without a written agreement aren’t entitled to anything in court – not even a mechanics lien. Reyes filed suit anyhow.

The Court’s Decision

(1) Construction of this treehouse was an improvement to residential property. That meant Reyes had to comply with Connecticut’s Home Improvement Act.

(2) Reyes wasn’t working for wages. He was doing home improvement work without a contracting license.

(3) Reyes didn’t qualify for lien rights for the same reasons that VillWell Builders did not have lien rights – no valid contract.

So, how did Reyes win this case?

If there is no valid contract and if there’s a good faith dispute about what’s owed, Connecticut courts won’t do anything to help a contractor collect. But this case is different. Reyes and Vivona agreed on Friday that $3,000 was due. Vivona wrote the check. The amount due was no longer in dispute. Stopping payment on that check was an act of bad faith. The court knew exactly how to handle that. Reyes got his judgment for $3,000.

You can expect the same treatment in the 32 states that require a written contract for residential work. If the job goes bad, you better have a good contract. If you’re using contracts that don’t comply with the law in your state, have a look at Construction Contract Writer. The trial version is free.

Liens vs. Contracts in Connecticut

Thirty-one states and the District of Columbia require a written contract for residential work. See my blog post Contracting on a Handshake for the list of states. But the obvious question is, “What happens if my job in one of those states doesn’t have a legal contract? Can I still collect?”

Last month, a Connecticut court answered that question – at least for Connecticut contractors. Here are the details.

Linda Tanuis needed new shingles on her house and garage in Bethlehem CT. Villwell Builders of Waterbury agreed to do the work for $19,152. Linda signed Villwell’s contract and work started. Everything went as expected until Villwell discovered a problem. An extra 35 sheets of plywood would be needed. Villwell noted on the contract “adding 35 sheets of plywood $3,000.” Linda initialed the change.

Villwell did good work – keeping Linda informed as the job progressed. When done, Linda paid Villwell the full $19,152. But then Linda got the bill for an extra 35 sheets of plywood. She refused to pay – not even the $3,000 noted on the contract. With no other choice, Villwell filed a mechanics lien for $8,126.

Notice the words mechanics lien in that last sentence. Why didn’t counsel for Villwell sue for the extra $3,000 as an approved change order? I don’t know. But I can guess. Connecticut is one of the 31 states that require a written contract for residential work. To be legal, the written contract for home improvement jobs in Connecticut has to:

• Be dated and signed by both owner and contractor.
• Include the contractor’s address and registration number.
• Describe (in bold type) the owner's cancellation rights.
• Show a start and completion date.
• Require that any change in contract terms be in writing, dated and signed.
• Disclose the name of every similar company the owner has had an interest in for in the last five years.

Counsel for Villwell must have known the contract with Linda wasn’t that good. Filing for a mechanics lien was a safer bet. Courts routinely enforce lien rights, even if there is no written contract.

Some background: Every state gives contractors a mechanics lien for the value of labor and materials used to improve property. No written contract is required. It’s enough if improvements were made with consent of the owner. Once filed, a mechanics lien is like a mortgage. Until discharged (paid), the lien holder has a secured interest in the property. Lien rights don’t allow recovery of the full contract price (including OH&P). But by filing for a mechanics lien, counsel for Villwell hoped to recover the value of extra labor and materials.

Can the Contractor Collect?

The court in Tanius v. Villwell Builders had to decide: If the contract is bad, does that also void mechanics lien rights? Connecticut General Statutes § 20-429(f) helps answer the question.

Nothing in this section shall preclude a contractor who has complied with subparagraphs (A)(i), (ii), (vi), (vii) and (viii) . . . from the recovery of payment for work performed based on the reasonable value of services which were requested by the owner . . .

To summarize: A Connecticut home improvement contractor still has lien rights if the contract:

(i) is in writing,

(ii) is signed by the owner and the contractor,

(vi) contains (in bold) a notice of the owner's cancellation rights,

(vii) contains a starting date and completion date, and

(viii) is entered into by a registered salesman or registered contractor.

In the Villwell contract, (1) the contractor's registration number was missing, (2) the cancellation notice wasn’t in bold, and (3) there was no start date or completion date. So the court cancelled the contractor’s lien for $8,126. Villwell collected nothing. Too bad. Villwell did good work. Only their contract was bad.

The Bottom Line

To be candid, not all of the 31 states and DC follow the Connecticut rule. But all 31 states have some penalty for contractors who ignore the law. Don’t gamble on lame contracts. Construction Contract Writer drafts letter-perfect agreements every time, no matter the state and no matter the type of job. The trial version is free.

Essential Contract Terms

Don and Molly Krumwiede had a serious house fire a few years ago. Their home in Allamakeen, IA was a total loss. Fortunately, Don and Molly had full insurance, including up to a year of living expenses while their home was rebuilt.

What Don and Molly needed next was a contractor. They met with Tim Kruse of Kruse "N" Bries Construction. Kruse brought along a plan book from the building material dealer Menards. Don’s choice was a plan called The Woodsman. Kruse went back to Menards for a detailed set of plans for The Woodsman. A few days later, Kruse came back with a five-page labor and material list for the new home: excavation, footings, framing, electrical, plumbing, heating, siding and so on. At the bottom of the last page, on a line titled "Total Materials and Labor" was the price $175,000. But the $175,000 was crossed out and replaced, in handwritten numbers, with “$190,000.” Under that total, typewritten in all capital letters and heavy bold type, were the words, "This is a bid not an estimate. 50% down payment required.”

The Krumwiedes liked the proposal and agreed to have Kruse "N" Bries build their house for $190,000. Molly and Don advanced $92,000 and Kruse started work. That was November 2012. But there was a problem.

Other than the material list, down payment and total price, there was nothing in writing: No start date. No completion date. Nothing about plans or specs. No payment schedule. Not a word about changes. In fact, the 5-page material list didn’t even mention The Woodsman.

As work progressed, payments to Kruse reached $168,000 including the initial $92,000. But in August 2013, when Kruse asked for the next payment, the Krumwiedes balked. Work was far from finished and their year of living-expense reimbursement was running out. With no more money coming in, Kruse "N" Bries stopped work and sent a final bill for $69,500. When the Krumwiedes didn’t pay, Kruse "N" Bries sued for $96,815.

What Should the Court Do?

Before deciding, here are a few things you should know:

• Don and Molly hired other contractors to finish the work. Their total cost for the home, including what was paid to Kruse "N" Bries, was about $250,000.
• While suit was pending, Don Krumwiede took a job in another state. He sold the new house, about half their acreage and existing outbuildings for $330,000.
• Testifying in court, Kruse claimed to have done work beyond the original bid of $190,000: a two-car garage instead of one, more living space above the garage and a walk-out basement.

Now take a guess at how much the court awarded Kruse “N” Bries on their claim for $96,815.

The trial court awarded the contractor exactly nothing -- zero. And last month the appellate court agreed. (2019 Iowa App. LEXIS 329) Here’s why. The court couldn't be sure what the contractor had agreed to build or when the owner had agreed to pay. For example:

• Kruse “N” Bries insisted the Krumwiedes breached the oral contract when they refused to make a payment in August 2013. The court didn’t agree. Nothing in the agreement set when payments were due.
• The court couldn’t identify anything the Krumwiedes received that they were not entitled to. The 5-page bid didn’t make clear what Kruse “N” Bries promised to build. For example, the plan for The Woodsman showed a one-car garage. But the 5-page bid didn't refer to The Woodsman and the permit issued for the job specified a two-car garage.

An Expensive Lesson Learned

Construction is complex. The contract for any job is like a road map -- getting you from where you are to where you want to be. Without a good map, expect a result like what happened to Kruse "N" Bries.  Construction Contract Writer makes it easy to draft letter-perfect contracts that cover all the essentials. The trial version is free.

Facts Win Cases

Every contractor has experience with construction disputes. Potential arguments (and court cases) lurk on every job site. When a dispute pops up, it’s not enough to insist, “Oh no, you told me . . .” You need hard facts:

•           Correspondence, written or e-mailed

•           Notes on conversations, directions and decisions

•           Minutes from job site meetings

•           As built drawings with dimensions

•           Inspections, tests, logs and reports

•           Responses to requests for interpretation.

The more complex the job, the more facts you’ll need to win any dispute. My architect friend Bill Mitchell tells a good story that illustrates the point – and offers a tip any contractor can use. Bill’s story starts with a job in San Francisco.

The next time you’re in San Francisco, walk through Neiman-Marcus store on Union Square. A central atrium runs the full height of the building. At the top of the atrium, a gorgeous stained-glass rotunda spans the entire space. I’ll let Bill pick up the story from here.

In 1984, I was about the eighth project architect hired to restore this rotunda after years of neglect. When I got involved, construction was already under way. My job was to oversee design. If you haven’t been to Union Square, I should point out that the Neiman Marcus rotunda is about the same size as the dome on most state capitol buildings.

The job had issues, and I really mean issues. The first problem was budget. The original rotunda consultant took his share and split, leaving me to complete the project on a shoestring. The next problem was materials. Reconstruction had to use as many of the original plaster pieces as could be salvaged. The dome had been broken out with crow bars and axes, trucked across the bay to Oakland on an unpadded flat-bed truck and then dumped in a public storage facility. There the pieces remained for eleven years while zoning and plans for the store crawled through layers of public approvals. Over those eleven years, souvenir-hunters helped themselves to armloads of the ornate antique plaster pieces. That’s when I got involved.

My inventory of the plaster parts revealed that only half the rotunda remained. The other half had vanished. I set up a plaster fabrication shop, did the shop drawings, and had crews start molding the missing plaster pieces. In the meantime, the general contractor was erecting the rest of the building around us.

The project was awash in design, construction and political intrigue. Any job like this attracts prima donnas – and their lawyers. I hated going to work. The entire site was thick with resentment, complaints and animosity. I couldn’t possibly keep written notes on all that. I had to innovate.

I bought a small hand-held tape recorder and a bag of blank tapes. (Remember, this was 1984.) Every day, hour by hour, minute by minute, I recorded everything that happened on that job: descriptions of the work, the people, the meetings, the attitudes, the refusals to cooperate, every verbal dispute, theft of our new plaster castings, everything. I made what had to be the most complete audio archive ever prepared for a construction project.

We finished the job in time for the grand opening. The rotunda was beautiful – and still is. Have a look the next time you’re in San Francisco. But, as I expected, blame ran hip-deep at project closeout. My company hired a defense firm to fend off legal attacks. When lawyers asked for my files and notes, I was ready. For months, my secretary had transcribed my audio recordings – over 200 pages of day-by-day, moment by moment, blow by blow accounts of the design and construction process as it actually happened. Everyone involved in that project had egg on their face. Clearly, no one was blameless. And that, to my relief, was the last we heard from opposing counsel.

Collecting the facts is much easier today. All you need is a cellphone. Just punch the record button. When you get into a dispute, let your cellphone do the talking.

Even better, work under a contract that resolves issues in your favor before they happen. The section “Responsibilities of Owner” in Construction Contract Writer will do that. The trial version of CCW is free.

Contractor Without a Contract

Nearly all public works projects are done on terms set by the public agency. The contractor has little or no say in the matter. It’s only on smaller residential and commercial jobs that contractors get to shape the agreement – offer terms likely to save the day if the job goes bad.

It should be obvious: Contractors with an opportunity to write their own agreements should jump at the chance. Yet, some don’t. Here’s an example:

Jennifer English needed some improvements to her home in Wallingford, Connecticut. Jonathan Ohr of Major League Builders agreed to do the work for a flat $50,000. There was no written agreement. According to Judge Abrams, “Mr. Ohr was not in the practice of entering into written contracts with his home improvement customers.” You can probably guess what happened next. The case is English v. Ohr, 2018 Conn. Super. LEXIS 5898.

With $46,800 paid and work still to be done, Ms. English locked her contractor off the site. The court didn’t explain what went wrong on the job. But the judge agreed that: (1) Mr. Ohr could have completed the job if he had access to the site. (2) By denying access, Ms. English committed an anticipatory breach of the verbal agreement.

Normally, that would entitle the contractor to damages and probably attorney fees. But remember, there was no written contract for this job. And that was a problem. Connecticut is one of the 31 states and the District of Columbia that 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.

It Gets Worse

Under Connecticut’s Home Improvement Act, doing work without a contract is an unfair trade practice. That authorized Judge Abrams to award punitive damages against both Mr. Ohr and Major League Builders. The judge didn’t do that. But the court’s opinion leaves no doubt about who was at fault in this dispute. If Ohr had a signed contract:

[T]he parties would have had a concrete memorialization of the scope of the project that would not have allowed for inconsistent expectations. As a result, the project could have been completed without significant incident and this litigation avoided.

In essence, the lawsuit was Ohr’s fault. So Ohr was ordered to pay the reasonable attorney fees of Ms. English.

Notice how absence of a written contract on the English job changed everything:

• According to Judge Abrams, there was no true agreement on what the job required.
• Ohr didn’t collect the last $3,200 due under his oral agreement.
• Ohr didn’t have the protection any good contract would have provided.
• Ohr had to pay both his own attorney fees and the fees of Ms. English.

Jonathan Ohr isn’t the only contractor to do business on a handshake. If that’s how you operate, have a look at Construction Contract Writer. Before you start any job, use CCW to write a construction contract that’s perfectly legal in any state where you build or remodel. The trial version is free.

Deletion Change Orders

Nothing I’ve seen causes contractors more legal headaches than change orders. If you’ve dipped into the pages of this blog over the last ten years, you’ve seen how changes in the work can spoil nearly any job. A New York case decided last month illustrates the point. Here’s what happened.

Lanmark Group, a New York prime contractor, won the bid to do nearly $15 million in improvements to the Vince Lombardi School in Brooklyn. Lanmark awarded the masonry part of the job to Graciano Corp. at a subcontract price of $5,320,000.

It didn’t go well.

Once work started, Lanmark and Graciano fell into bickering – mostly about delays. Graciano blamed Lanmark and demanded $500,000 more for extra shifts and supervision needed to stay on schedule. Lanmark didn’t agree. With the masonry about 30% done, Lanmark gave up on Graciano, issuing a change order that deleted most of the remaining work. Lanmark hired another masonry sub to finish what Graciano hadn’t. Graciano sued, claiming wrongful deletion from the contract. By way of defense, Lanmark cited clear language in the agreement with Graciano:

"[A]t any time, in any quantity or amount, without notice to the sureties and without invalidating or abandoning the contract, [Lanmark] may add or delete, modify or alter the Work to be performed under this Agreement.”

And that’s what Lanmark did, cutting Graciano out of most of the remaining masonry work.

You Decide

What should the court do? A change order deleting 30% (or any percentage) of the job was Lanmark’s right under their agreement. And courts are loath to re-write contracts. When the words are clear, contracts get enforced as written. But consider this: If a prime contractor can throw any sub off the site by issuing a deletion change order, what’s the value of any subcontract?

I like the way the court decided Graciano Corp. v Lanmark Group. Deletion change orders are perfectly legitimate. But there are limits. In this case, Lanmark’s change order eliminated too much of the work. In the words of the court, Lanmark altered “the essential identity and main purpose of the subcontract.” Graciano’s bid was for a “complete masonry installation.” After deletion, Graciano was left with only crumbs. The court ruled that Graciano could proceed to prove their loss.

Notice that the Graciano case involved a deletion change order. Back in March of 2013, I wrote a blog post about change orders for additional work. In that case, a contractor working at a Colorado ski resort got stuck in a cost + 10% contract. The owner issued change orders for more and more work, many extra weeks, all to be billed at cost + 10%. The contractor wanted out of the deal. He was locked into working for wages at a time when good work was plentiful at better markups. The court in that Colorado case turned the contractor free, citing the “cardinal change” rule. Changes to a contract have to be within the general scope of the agreement and have to be relatively small. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract.

I believe the cardinal change rule works well for both deductive and additive changes.

Now Watch This

A few minutes studying the contract could have saved Graciano a major headache. I hope you wouldn’t sign any contract that allowed the other side to make changes at will without negotiation. That’s elementary. And it’s just the beginning. There’s plenty more to know about staying out of trouble with change orders. It’s all at your fingertips with Construction Contract Writer. The trial version is free.