Subs or Gig Workers?

Every contractor understands the advantage of using independent contractors rather than hiring employees: No FICA or FUTA, no workers’ comp, no sick leave, no overtime. Using gig workers cuts at least 30% off labor costs. Great choice!

But you probably detect problems lurking here. I’ll explain by offering a little history.

Statutory Employees

A hundred years ago, employees injured on the job could sue their employer. Recovery often took years. Meanwhile, employees went without medical treatment and without essential rehab. Early in the 20th century, state legislatures stepped in, enacting the first workers’ compensation laws. Workers’ comp took away the right to sue an employer for negligence and gave back compensation for on-the-job injuries, regardless of fault.

From that day, nearly all employers, including construction contractors and subs, had to buy workers’ comp coverage for employees. A sub who didn’t buy workers’ comp coverage made the next contractor up the chain liable for coverage. Usually, that made the prime contractor’s carrier liable for injury to a sub’s employee. The prime contractor became the “statutory employer”.

That solved one problem. Injured employees always got workers’ comp benefits. But it created another problem. Workers’ comp carriers for the prime could be exposed to claims from every sub on the job. The remedy should be obvious. Prime contractors learned to insist that subs and sub-subs carry workers’ comp insurance on their employees.

Enter the Gig Worker

Remember where we started: Contractors save 30% on labor cost by using independent contractors. Now the problem: Where contractors and subs are licensed, about half the licensees claim to have no employees. Since only employees are covered by workers’ comp, about half the trades on your job may have no workers’ comp coverage. If true, that could make you the statutory employer.

Being a statutory employer cuts two ways. First, you’re not going to get sued. Workers’ compensation is the exclusive remedy when an employee is injured on the job. Second, your cost of workers’ comp coverage is going to jump the next time there’s an audit.

How to Protect Yourself

1. Trade certificates of insurance with subs before work starts. Certificates of insurance confirm that coverage is in effect and will show coverage limits. The sub’s policy limits should match limits in your coverage.
2. Be alert for subs who rely on gig workers and claim few or no employees. That could be misclassification, employees passed off as independent contractors. You become the statutory employer for misclassified workers. If the tradespeople are true gig workers, you’re not the statutory employer. Fine. But those tradespeople are not covered by worker’s comp. That means you’re likely to be sued for any injury on the job.
3. Use written subcontracts. Have each sub sign an agreement before work starts. A signed agreement is the best evidence that work is being done by an independent contractor, not an employee. In that agreement, include a clause that requires subs and sub-subs to carry workers’ comp insurance on employees. Include an indemnification agreement. If you’re found liable as the statutory employer, you can recover against the sub.

If you’re not using written subcontracts or if your subcontracts don’t require subs to carry insurance, have a look at ConstructionContract Writer. The trial version is free.

 

Bailing Out of a Bad Contract

Most of what you read here is about drafting good contracts, not about bailing out of bad deals. But bad deals happen – such as to a Florida contractor I advised last week. “How do I get out of this contract?”

I’ll count the ways.

First, understand the measure of damages, what you stand to lose by simply walking off the job. That's material breach of contract. You’ll be liable for the difference between your contract price and what it cost the owner to have another contractor finish the job. But that’s just the beginning. The owner can claim attorney fees (for bringing suit) and file a grievance with the state license board. If you lose the suit for damages and don’t pay, the owner can make a claim against your license bond. If the bonding company pays off, they’ll come after you to recover their loss.

That’s the worst case. But it doesn’t have to happen.

Obviously, the key words here are material breach of contract. The first to commit a material breach will be liable for damages. See my blog post on breach of construction contract. 

Any act by the owner that smacks of material breach can release your contract obligations.

If the Owner Didn’t Breach?

All is not lost. A surprise in the job can open the contract to re-negotiation. Surprises (changed conditions) come in hundreds of flavors. See my blog post.

Contractors are not insurance companies. No contract requires that you overcome every conceivable challenge (changed condition) on site.

Another example: Suppose you discover the owner is slow-pay or short on cash. What then? No contractor has to keep working when an owner has stopped paying.

What if you under-bid the job and can’t possibly perform at the price quoted? Again, all is not lost. I have a friend who did exactly that – on a contract with a government agency. At bid opening, his price was many thousands lower than the next lowest bidder. Turns out, his estimate had omitted finishing the entire second floor. My friend’s company completed the job anyhow – and ended up in bankruptcy. I don’t recommend that.

If you under-bid a job and want out, your legal counsel will advise on the doctrine of mistake. Courts will “reform” (re-write) a contract for some types of mistakes:

• An error in calculation, especially if the mistake is obvious.
• An error so serious that enforcement would be irrational.
• Where the contractor relied on some fact the owner knew wasn’t true.
• When both contractor and owner assumed something fundamental about the job that wasn’t true.

The most common mistake is omitting something from the estimate. On private jobs, it’s easy to shift that risk to the owner. Make your estimate define the job. Anything not included in your estimate is not part of the job. Construction Contract Writer offers good options.

Another way out: write into the contract a termination clause – either for cause or for no cause at all. My recommendations are here.  Construction Contract Writer makes that easy. The trial version is free.

Find the Best Jobs

I’ve heard builders claim they take only 10% of the work that comes their way. Even when work is scarce, every builder’s challenge is selecting the good jobs and taking a pass on the losers.

“So how do I know a good job when I see it?” Here are some rules most successful builders would endorse.

Start by understanding what the owner needs and can pay for. That requires careful listening. Your prospect has a problem: a site that needs a building or a building that needs improvement. Listen as your prospect explains the problem – exactly what’s needed. Be especially alert to likes and dislikes. Prospects are usually more emphatic about what they like or don’t like than about what’s really needed. Make notes on expressed dislikes. Offer a solution that ignores a key dislike and you’ll get nowhere.

Qualifying Your Prospect

When your prospect has explained what’s needed, begin qualifying your potential client. Is this work you want or a job you should skip? Many projects will never be built. Don’t waste time estimating a project and writing a contract for a job that’s never going to happen. Here are some clear danger signals:

• The owner is undercapitalized or isn’t a good prospect for commercial lenders.
• Code or zoning restrictions make the work impractical.
• The owner isn’t being realistic about the cost or what can be built.
• The perceived need is based on assumptions that seem tenuous or transitory.
• The owner has been turned down by several builders.
• Your prospect may not have authority to contract for the project as conceived.

Within the first few minutes, your owner is likely to start asking questions: “What’s the best way to do this?” or “What do you think about . . .?” or “What would it cost to . . .?” or “Can you supply a list of references?” Respond to the questions, of course. But treat this as an opening to begin asking your own questions:

• “Have you talked to anyone about financing?” Obviously, finance is a key question. Every owner wants to improve their property. Not every owner can qualify for the financing needed to carry a project.
• “Do you have a budget in mind?” This is another key question, the beginning of price negotiations.
• “When would you like to see this job finished?” Identify unrealistic expectations as soon as possible.
• “Have you talked to any other builder [architect, engineer, or consultant] about this job?” If so, ask, “What did they say?”
• “Have you considered . . . ?” Try to identify zoning or code problems, potential issues with neighbors, design review committees, setback requirements or anything else that could halt the project.
• A clear danger signal: The owner isn’t being candid – doesn’t give believable answers to these questions.

If You Really Want That Job

• Be the most thorough, most complete, most diligent competitor. If you ask owners, especially private owners, why they selected a particular contractor, the most common response will be, “They gave me a good proposal.” In the eyes of an owner, a contractor who doesn’t respond promptly and completely is unlikely to complete the job as expected.
• Be friendly and likable, someone the owner would consider a good contact. No one wants to disappoint a friend.
• Provide something unique, an insight or option the owner didn’t consider. You’ve probably won the job if an owner likes one of your suggestions well enough to request the same feature from other contractors.
• Respond 100% to every concern. The essence of salesmanship is eliminating objections. If necessary, ask the question, “What do I have to do to get this job?

Part of every complete response is a professional-quality contract that complies in every way with state law. I recommend Construction Contract Writer. The trial version is free.

Rock Clause

 “I need a rock clause.”

I got that request earlier this month. I think you need a rock clause too. Here’s why.

The name ”rock clause” comes from a common construction problem – rock where no one expected rock. If you do much excavation, you understand the problem: a ledge of rock or hard pan, or boulders, or a high water table, or unstable soil. All can increase your costs.

But a rock clause can cover more than excavation. It sets up recovery for site conditions not anticipated by the owner and the contractor. A rock clause is protection from any type of unforeseen site condition. And it makes good sense -- a benefit to both the contractor and the owner. You can bid jobs based on what’s known and expected, not on the worst possible contingency. If site conditions are different from what was expected, you get paid for work actually done. The owner gets more competitive bids with smaller contingency allowances.

Here's a typical rock clause (from Construction Contract Writer):

Contractor shall promptly, and before the conditions are disturbed, give a written notice to owners on encountering unforeseeable conditions adversely affecting the work. Owners shall investigate the site conditions promptly after receiving notice. If the conditions cause an increase in cost to contractor or the time required for performing any part of the work and were not reasonably foreseeable by an experienced contractor, an equitable adjustment shall be made under this clause and the contract modified in writing accordingly.

This clause is essentially the same as Federal Acquisition Regulation § 52.236-2, used routinely on federal construction projects.

Courts in some states recognize two types of unforeseen site conditions. Type I is any hidden condition materially different from what the contractor is entitled to rely on. Type II is a hidden physical condition consistent with the contract documents but very different from anything normally encountered. For example, in an excavation contract, Type II differing site conditions may exist if the rock is much more extensive and much denser than expected.

Both Type I and II conditions are harder to substantiate if:

(1) The owner offers no information about site conditions or disclaims the accuracy of any information offered; and

(2) The contractor doesn't visit the site or doesn’t investigate all information available; and,

(3) A reasonably prudent contractor would have anticipated the conditions actually found; and

(4) The contract specifically makes the contractor responsible for unexpected site conditions.

In home improvement work, “unexpected site conditions” cover far more than excavation. Nearly any surprise found on site can be covered by a rock clause: wiring or venting where not expected, substandard framing, foundation, plumbing or electrical work -- anything unanticipated that’s found after construction begins.

Collecting under a rock clause is always a matter of proof (and negotiation): Would a reasonably experienced contractor have expected a problem like this? Still, you’ve got a leg up and more leverage if your contracts include a rock clause. For better protection against the unexpected, have a look at Construction Contract Writer. The trial version is free.

 

Collect for Mandated Changes

I had an interesting question last week from Bryan, a Tennessee contractor.

Bryan wondered why any contract needs to say that changes require mutual agreement. Isn’t that the law? Better to keep contracts short and sweet. Anything in a contract about changes requiring mutual agreement is surplus. Right?

Bryan acknowledged that some owners can’t resist changing the scope of work. “I definitely do not want to agree to that in my contracts.” Owners need to understand: They can’t make changes any time they want. That goes without saying. So why say it?

“If I leave it out, the law will be on my side if an owner tries to force me into a change in scope, correct?”

Good Question.

Changes are an important issue on any job. Few jobs are completed without at least a couple of changes. Construction is too permanent and too expensive to ignore opportunities for improvement as they become obvious.

I did a blog post on discretionary changes a few years ago. 

Here are some good rules to follow on all changes, discretionary or otherwise: 

To answer Bryan’s question:

The "mutual agreement" language wouldn't be needed in contracts if all changes were discretionary. But many changes aren't -- such as changes required by the inspector or an emergency or a shortage of labor or materials or a mistake in the plans or unexpected site conditions.

The issue in mandated changes isn’t, "Will extra work be part of the job?" The work has to be done, with or without mutual agreement. The issue will be, "Who pays?" An owner might say, "It's not my fault. You're the professional. You should have known! It's your problem. Deal with it."

The "mutual agreement" language in a contract strengthens your hand when the only issue is price. Your reply could be, "OK. The change is required. We can agree on that. It’s extra work, not part of our contract. Here's my price. Do we have mutual agreement?"

You know the job and the owner. If required changes are likely and if the owner can be expected to play hardball on changes, I recommend including language on required changes in your contract:

• Any change required to conform to laws, codes or ordinances is extra work.
• Any change required due to defects in the plans or specs is extra work.
• Any act or omission by the owner which increases cost or delays completion is extra work.

If problems are likely on mandated changes, write a little extra leverage into your contract:

• Failure to agree on changes won’t delay payment for any other part of the job.
• Charges for extra work will be the contractor’s normal selling price on similar jobs.

Construction Contract Writer makes it easy to draft letter-perfect contracts that anticipate problems and resolve disputes in your favor. The trial version is free.

New Law for NY Roofers

Every contractor doing roofing or siding work in New York got a new challenge last month. NY General Business Law, § 770(8) and § 771-b set new standards for roofing and related work. To earn the right to collect on the job, your contract has to include new disclosures. The new law is fairly detailed. So stay with me.

Who’s Covered?

Every roofer working on an existing residential or non-residential building. But the definition of “roofing contractor” will be a surprise to many. A “roofing contractor” is any:

independent contractor, day laborer or subcontractor engaged in the business of roofing, gutter, downspout or siding services for a fee or who offers to engage in or solicits roofing-related services, including construction, installation, renovation, repair, maintenance, alteration or waterproofing

Nearly anyone doing work on the roof of an existing commercial or residential building is covered. For example, waterproofing, installing or repairing gutters or downspouts or replacing siding makes you a New York “roofing contractor”. New construction and demolition are excluded.

What’s Required of “Roofing Contractors”

This is where the new law gets down and dirty. A written contract is required. The contract has to include:

• All the disclosures required in NY home improvement contracts.
• The name of the contractor’s liability insurer.
• Confirmation of at least $100,000/$300,000 policy limits.
• Certification that the contractor will provide either (1) a certificate of workers' compensation covering all employees, or (2) A Certificate of Attestation Exemption (CE-200) from the Workers' Compensation Board.

Other Mandates of the New Law

• No payment is allowed until materials are delivered to the job site.
• Roofing jobs have to follow the plans and specs and have to comply with the applicable building code.
• Roofing contractors have to pay for materials and services used on the job once the contractor has been paid.

Special Requirements for Insurance Jobs

• The contractor can’t offer to pay or rebate any of the insurance deductible.
• The owner has three days to cancel the deal after any part of the claim is denied. There’s an exception for emergencies.
• No cancellation form is required in the contract. The deal is cancelled when an owner says the deal is off (by either registered or certified mail).
• Roofing contractors can’t negotiate terms of settlement with the insurance carrier.

The effect of all this is to make every New York roofing, siding or waterproofing job a home improvement project, whether the job is on a residence, apartment, store or office. That’s a major change.

Until now, commercial contractors didn't have to make the pages disclosures required in home improvement contracts: mechanics’ liens, trust funds, progress payments, hourly pay, right to cancel, right to receive a copy of the contract, insurance coverage. Now all that is required if work includes roofing or siding.

There’s good reason to comply with the new law. Technical violations earn a fine of $100. The civil penalty for substantial violations is $250 or 5% of the contract price for each violation. Worse, New York courts won’t enforce a roofing contract that falls short of what the law requires.

It's easy to write contracts that comply precisely with New York’s new roofing act – or the law of any state and for any type of project. Have a look at Construction Contract Writer. The trial version is free.

 

Surviving Past the Age of COVID

News Headline: US housing starts drop to the lowest level since 2015.

Government restrictions, lockdowns and a slowing economy have added a layer of problems for residential contractors. When work slows, income dries up. Expenses like debt service and overhead continue as if nothing had changed. Too much of that can stress any construction company.

Here’s a checklist to help your company survive long enough to thrive once again when the pandemic is history.

Cherish cash. Money to a construction company is like blood circulating in your veins. When the flow stops, no contractor lasts long. 

If you’re using advances and progress payments on the current job to satisfy creditors on prior jobs, you’re transferring debt. That’s like a game of musical chairs. When the music stops, as it has now for many, you’re stuck with bills that can’t be paid. My advice when cash is short: Use the money and credit that’s available to meet expenses on the current job. Keep materials and supplies coming and keep meeting payroll. Creditors owed on prior jobs will have to wait.

Be candid with those you can’t pay. Keep a list of creditors and the amount owed each. Tell creditors, “We’re short on cash right now due to the economy. I keep a list of who’s owed what. You’re on my list. No need to make threats. I promise to pay when cash is available. That’s the best I can do for now.”

That should satisfy some, at least temporarily. Others will threaten suit. Secured creditors will take back their security. Don’t let lawsuits bother you. Getting sued isn’t so bad. It’s the sign of a desperate creditor. Months will pass before anything actually happens. As time passes, most creditors will find a reason to compromise the debt, especially if you agree to make at least token payments. Other creditors may go belly up or simply give up trying to collect. Either way, you get months of breathing room and remain in control. The goal is to stay in business. You’re in survival mode. Keep working. Keep earning advances and progress payments on current jobs.

Focus on profits. When work is scarce, it’s tempting to look for larger jobs that can keep your crews and subs busy long term. Unfortunately, jobs like that are the most competitive and usually carry the slimmest profit margins. Smaller jobs often come with more generous margins. Larger, better-financed contractors can’t be bothered with the distracting trivia that’s common on small jobs. If you’re prepared to deal with picky, indecisive, argumentative owners, and if the profit margins look promising, consider stepping down a notch. Smaller jobs often come with shorter payment schedules and fatter margins.

Be selective. Don’t take on extra work just for the extra cash flow. No contractor loses money on every job and makes it up in volume. Doesn’t happen. More often, extra low-margin work results in extra headaches, especially when finances are tight.

Plan for the recovery. When too many contractors are chasing too little work, put your business in mothballs for a while. Construction contracting will pick up again. It always does. Use the idle time to do strategic planning. Where will the opportunities be when business revives? What skills and equipment do you need to capitalize on that revival? How will you finance growth of your company when the economy rebounds? Get yourself and your team ready to jump back into business. Have a plan. Focus on a particular job or area where success is most likely. Every major change in the economy creates pockets of opportunity. Change is coming. Commit to preparing yourself and your organization for that day.

A skill ever contractor needs: Writing contracts that comply with state the law and protect against the unexpected. For that, there's no better tool than Construction Contract Writer. The trial version is free. 

Contractor Liability for COVID-19 Claims

Who pays when someone on a construction site gets sick or dies from COVID-19? Long after the pandemic has passed from headline news, lawyers for plaintiffs and defendants will be battling over this issue. But I see a more immediate question: What can contractors do right now to avoid COVID claims?

Rule of thumb: Occupational injuries are covered by workers’ compensation insurance. All states require that employers carry workers’ comp. Scope of coverage varies by state. But workers’ comp in every state covers occupational hazards. No doubt in my mind, COVID is an occupational hazard on construction sites. Crews have to work together, sometimes in confined spaces and often sharing tools. Expect any employee who gets COVID on the job to have a claim likely to be settled by the workers’ comp system. A contractor has no liability for that work-related injury because worker’s comp is an exclusive remedy. In return for automatic coverage, employees give up the right to sue their employer.

But There’s a Loophole

In most states, an employee can still sue for on-the-job injury if the contractor’s conduct was “deliberate”, creating a substantial certainty that injury or death would result. That’s a high hurdle but is likely to become an issue in future claims. In a case filed last month (Toney Evans v. Walmart), a Walmart employee died of COVID. The employee’s estate claims Walmart knew sick employees were coming to work. Walmart didn’t isolate infected employees, didn’t disinfect the store and failed to follow guidelines from the CDC.

It's easy for construction contractors to stay out of the “deliberate” category and thus avoid liability. Get a copy of the CDC standards for construction workers and follow the CDC recommendations.

What About Liability to Subs?

Most work on construction sites, especially on residential jobs, is done by subcontractors. Any sub with employees has to have worker’s comp insurance. But many subs are small firms, often a sole proprietor with no employees. Most states don’t require the self-employed to buy workers’ comp insurance. So, a self-employed sub infected with COVID on your job could have a liability claim against your company – for both medical treatment and time lost from work. That could be expensive. Your workers’ comp policy isn’t going to help. Workers’ comp covers only employees, not your subs. So how do you protect yourself? The answer is in your subcontracts.

Written subcontracts can:

1. Require subs to provide workers’ comp coverage for everyone on the job.
2. Require subs do the same in every sub-sub contract they write.
3. Include an indemnity clause that makes the sub responsible for damages resulting from the negligence "in whole or in part" of either the subcontractor or a sub-subcontractor

It’s too soon to know how much liability for COVID losses on construction sites will fall on contractors. Politicians in Washington DC and state capitals are wrestling with employer liability for pandemic losses. But your contracts can protect against COVID-19 losses right now, no matter what the politicians decide. To draft subcontracts that protect against the unexpected, have a look at Construction Contract Writer. The trial version is free.

Construction Contracting After COVID-19

I’m a lawyer, not a doctor. Neither am I an economist. So, I’m not going to offer medical advice. And I’m not going to make any prediction about when the economy will recover. But this is clear to me. Post COVID-19, changes are coming. No industry is exempt, certainly not construction contracting.

I’ve witnessed four complete business cycles during my productive lifetime. These were the good years for contractors:

• 1975 to 1978 -- recovery after the Viet Nam war
• 1982 to 1984 – recovery from the recession of 1982
• 1990 to 2005 – the longest expansion in US history
• 2010 to 2020 – recovery from the Great Recession

And there were bad years: 1974, 1981, 1989, 2009. Each of these coincided with an economic recession. Employment in the construction industry dropped by 10% or more. Typically, residential construction was the hardest hit.

What Happens Next?

Economists agree we’re on the threshold of another recession. If history is a guide, construction activity will be down for at least several quarters. Hardest hit: discretionary work like home improvement. Casualty loss work is different. It comes and goes with the seasons and tends to be local. But it’s a good option for residential contractors with the patience and the administrative skills to deal with adjusted losses.

Expect labor and material price changes. Material shortages are likely as industry adapts to changes in work requirements. To see what I mean, walk in any supermarket. Some shelves are bare. Promotions and discounts are largely gone. Any retailer that’s open can sell anything in stock. No need to cut prices. Building material dealers may face the same uncertainty in the coming months.

Over the last decade, construction costs (labor, material and equipment) increased barely 2% a year. That’s not typical. If you aren’t old enough to remember the 1970s, then you don’t remember when construction costs jumped 1% or more a month. Inflation back then was driven by record deficits that financed the Viet Nam war. Expect the debt bomb of 2020 to put similar pressure on construction costs well into the next decade.

Protect Yourself

In uncertain times, you need contracts that anticipate problems. For example:

Supply of labor and materials. Think about the imported materials on your jobs. How much comes from abroad? Lumber, cement, nails, wallboard, electrical and mechanical parts, plumbing fixtures, appliances, tools? If the US de-couples from supply chains that extend back to China, many of these materials may be in short supply for at least a while.

Cost inflation. There’s risk in any job that lasts more than a few months. For example, if the job won’t be finished for six months or more and costs are increasing 1% a month, most of your profit margin could be drained away by higher prices.

Plan for material shortages and price changes. You’re not an insurance company. You shouldn’t have to absorb all the losses. Write contracts that:

• Allow substitution of materials when necessary to meet job requirements.
• Pass higher costs to the owner when prices increase before work is done.

How do you do that? Easy! Construction Contract Writer offers all the options. Just click a box to protect your company and your bottom line.

Construction Contracting in the Age of COVID-19

As of this writing, governors of five states have issued “stay at home” orders. How many more states will do the same is anyone's guess. So far, each of these orders is different.  But all prohibit going to work – except for essential services. On that basis, nearly all construction jobs in these states will stop. What should you do? Who pays? At what cost?

This isn’t simple, as I’ll explain.

The obvious issue is project completion dates. Sixteen states (AZ, CA, CT, DC, HI, IN, MA, MD, ME, ND, NV, NY, PA, TN, VA, VT) require a scheduled completion date on residential construction contracts. Any schedule is out the window when a job is shut down by a pandemic. I’m going to assume that courts and license boards in these sixteen states will do the intelligent thing – extend contract completion dates by at least the duration of the shutdown.

Two states take a different approach.

• West Virginia § 142-5-3.1.2 requires either a completion date or a statement that there is no estimated completion date in home improvement contracts. If the contract has a completion date, West Virginia § 142-5-3.1.12 excuses late completion if delay is beyond control of the contractor. Obvious example: a government-mandated shutdown.
• New York General Business Law § 771 requires that home construction, improvement and repair contracts state whether time is of the essence. That can be poison, as I explained in January. When time is of the essence, most courts will consider any delay in completion to be a breach of contract. There is no excuse.

No state requires a completion date in commercial construction contracts or subcontracts. But many public works and commercial contracts include a completion date – with charges assessed for delay. These same agreements usually include a force majeure clause to extend the completion date for exceptionally bad weather, war, strikes, lockouts, etc. A good force majeure clause requires an executed change order for any delay beyond control of the contractor. Examples: pandemic or a government shutdown.

Who Pays?

Shutdowns are expensive. Your crews are out of work and may not be available for recall. The site and materials have to be secured. Labor and material costs may be higher when work resumes. Meanwhile, overhead expense goes on as usual:

• Direct overhead -- temporary utilities, supervision, equipment, some insurance
• Indirect overhead -- general management, estimating, selling, accounting, bookkeeping, business licenses, taxes, professional and clerical fees.

Is it reasonable that a contractor cover all these costs? Or is government-mandated delay extra work for which extra pay is required? A pandemic isn't the fault of anyone. Common sense requires sharing the burden of government shutdown between owner and contractor.

My advice

If your job is shut down by government order, notify the owner immediately – in writing:

• Work is suspended. You’ll do what you can to preserve and protect the job site.
• Suspension by government order is excusable delay for which you are not responsible.
• Pledge to resume work when the order is lifted.
• Cite costs that will increase during any protracted delay.

Include with your notice a draft change order for signature by the owner:

• Amend the completion date. For each day of suspension, the completion date should be moved back 1.3 calendar days.
• Make it clear that government delay is extra work for which you are entitled to extra compensation.

Protect yourself on all future jobs. Work under contracts that:

• Require the owner to execute a change order for excusable delay. 
• Make it clear that government-mandated shutdowns are excusable delay.
• Require reimbursement for both inflated costs and higher overhead expense after an excusable delay.

Want to see how good contracts protect your business in times like these? Construction Contract Writer does all this right now. Have a look at the navigator section Delay Claims. The trial version is free.

Questions for HomeAdvisor

If you do any residential work, you know the name. HomeAdvisor is a Web directory of local contractors. The idea behind HomeAdvisor is simple. Read what your neighbors say about contractors they know. Then get a quote from the contractor of your choice.

HomeAdvisor traces its roots back to Angie’s List. In 1995, Angie Hicks went door-to-door in Columbus, Ohio, signing up anyone who wanted to see her list of recommended contractors. In the first year, Angie got over 1,000 owners to pay a fee and sign-up. A business was born.

Soon Angie met a venture capitalist with access to millions in investor funds. You may not have heard of ServiceMagic, or Instapro, or MyHammer or HomeStars, or MyBuilder, or Handy. All offer an on-line list of contractors. And all are now part of HomeAdvisor -- listed on the NASDAQ as ANGI Homeservices, Inc.

Make no mistake, pairing up customers and contractors is big business. Home Advisor claims millions of subscribers (owners), more millions of paid members (contractors), $1.326 billion in annual revenue and ‎4,500 employees. Headquarters are in Denver, Colorado.

Those 4,500 employees are why you’ve heard of HomeAdvisor. When H-A discovers you do home improvement work, your business goes on their call list. Expect multiple calls from HomeAdvisor sales reps until you buy in.

With all that revenue from contractors, HomeAdvisor elected to turn their directory into a freemium service. Since 2016, any owner can scan the list of contractors and check the reviews. No cost. But contractors had to pay to get listed. And it’s not cheap. Annual charge is several hundred dollars plus a fee of $25 to $75 per lead. Contractors report paying $1,000 a month or more for the listing. Money well spent? Click here to read contractor comments. 

Worse Still

Until recently, HomeAdvisor only matched contractors with owners. The owner and the contractor had to strike a deal. Now H-A offers another option, “upfront” pricing:

• H-A quotes a fixed price for the work without ever seeing the job.
• H-A selects the tradesperson to do the work.
• H-A collects in full before anyone arrives on site.

Obviously, H-A has to limit these “upfront” jobs to small, simple tasks, like cabinet repair, patching walls or ceilings, replacing a plumbing or electric fixture or re-glazing a window.

If you’ve dipped into this blog any time in the last ten years, you’ll recognize some issues with H-A’s new “upfront” business model:

• H-A won’t reveal the names or numbers of tradespeople sent to do the work. There’s no way to check references or license status. Is that a little weird from a company built on contractor references?
• Any agreement to do construction work at a set price is a construction contract. Every state regulates home improvement contracts. Most states limit the initial payment and require written contracts with plenty of notices and disclosures. Where is the H-A written contract?
• Any time a tradesperson makes improvements to an owner’s primary residence, law in every state gives that tradesperson a construction lien. When work will result in a lien on an owner’s primary residence, federal law requires delivery of a Reg-Z notice – in duplicate. Where’s the three-day right to cancel?

In short, HomeAdvisor’s new “upfront” model ignores state law, violates federal regulations and defies common sense. Home Depot and Lowes don’t make mistakes like that. Installation services from both come with contracts that comply perfectly with both state and federal law.

My question: How long can a publicly-traded company like HomeAdvisor skate around state and federal law?

If you’re serious about staying legal, no matter the state or type of work, have a look at Construction Contract Writer. The trial version is free.

Use T-I-L to Close More Deals

Most contractors want to get paid when the job is done. That’s human nature. But it may not be the best way to do business. Ask any car dealer what would happen if every buyer had to pay cash on delivery. Sales would tank. Credit can create sales opportunities you didn’t know existed.

Some of the most successful builders offer a credit term -- monthly payments after the job is done. If you’re in a position to defer part of the income from completed jobs, consider making credit part of your sales pitch.

It's perfectly legal to take an IOU for part of the job or stretch out payments after work is done. But a construction contract with a deferred payment term has to include disclosures required by the Federal Truth in Lending Act (T-I-L). Banks, car dealers and finance companies are good at writing agreements with all the required disclosures. It’s at the heart of their business. But any construction contractor can do the same thing. And Construction Contract Writer makes it easy.

This is one area where home repair and improvement specialists have an advantage over custom home builders. I don’t know any new home builder that offers to finance what they build. But it’s a natural for repair and remodeling contractors to offer extended payment terms, especially when that helps close the deal.

All the Details

The Financing Calculator in Construction Contract Writer does all the T-I-L math. Enter into the calculator what you know: the bid price, the down payment, other charges and credits, the proposed interest rate, the number of payments. Those are easy. CCW's financing calculator does the heavy lifting -- figuring the amount financed, the finance charge, the APR, monthly payments, etc. -- and inserts those numbers into your construction contract. All disclosures required by T-I-L are automatic.

Even if you don’t plan to offer credit on a job, T-I-L disclosures have to be in the construction contract any time you recommend a lender – even if the lender makes all T-I-L disclosures in the loan docs. If you’re in the habit of recommending a lender to clients, the finance calculator in Construction Contract Writer should be part of your tool kit. Fail to make the required disclosures and you’re liable for both the overcharges and your client’s attorney fees. You don’t need that.

One other point: CCW doesn’t write the loan docs. You’ll still need the IOU. But all T-I-L disclosures and payment terms are laid out precisely in the construction contract. Just copy and paste from your CCW contract to the loan papers.

The trial version of Construction Contract Writer is free. If you can use CCW to close more deals, the full working version is $119.

When is Time of the Essence?

Question: “My client wants a completion deadline written into our construction contract. What should I do?”

My advice: Avoid committing to a firm completion date. Instead, lay out a proposed schedule – beginning date, milestones, completion estimate. Explain the contingencies you can’t control: weather, permits, inspections, changes, labor and material shortages, conflicts between trades, etc. Be blunt: Anything can be done either good or cheap or fast – but not all three. Don’t concede to unreasonable expectations.

Many states require beginning and completion dates in home improvement contracts. Courts usually consider these to be estimates, not firm deadlines. Writing “time is of the essence” into your contract is entirely different. If those words are in your agreement, missing a deadline gives an owner the right to bail out of the deal – or maybe worse. A Connecticut case decided last month illustrates the point.

Janet Lazzaro wanted her home on Casement Street in Darien, CT demolished and rebuilt. She had WBG Holdings prepare the plans and accepted their bid of $471,000.00 to do the work. That was in December 2016. Page one of their agreement made “time of the essence.” Work was to be completed within seven months after the start of demolition.

WGB had the good sense to write contingencies into the schedule. Delay due to a host of conditions (weather, acts of god, fire, flood etc.) would extend the completion date. Janet paid WGB $7,000.00 in December 2016 and another $52,000.00 in January 2017.

Demolition began March 10, 2017 and continued for the rest of the month. Work was delayed by winter storms, late winter and spring rain which required pumping out the site, muddy ground, extra engineering and drainage requirements, equipment breakdown, delays in permitting, inspection and site requirements imposed by town officials. (Does any of this sound familiar?) Nearly eight months after the contract was signed, WGB still didn’t have a permit to begin construction. On October 18, 2017, seven months after demolition started, the Town of Darien granted a permit for foundation work. Janet terminated the contract the same day and hired another contractor.

But WGB still wasn’t done with the Lazzaro job. Janet filed suit, claiming:

• A partial refund on the $85,000 paid to the date of termination.
• The extra $116,400 she had to pay another contractor to finish what WGB started.
• Lost rental income, real estate taxes, bank charges, mortgage interest and living expense caused by missing the completion date.
• Recovery of attorney fees for violation of Connecticut’s New Home Construction Contractors Act.
• Compensation for breach of the common-law covenant of good faith and fair dealing.

The Court’s Judgment

WGB did some things right. For example, WGB kept a job log that documented reasons for delay. Still, making time of the essence was plainly a mistake. Judge Sommer ruled those words gave plaintiff a right to terminate the agreement and hire another contractor. That contractor offered testimony at the trial: In his opinion, both Janel Lazzaro and WGB “significantly underestimated both the cost of the project and the time required to complete it.” The actual cost of construction was $587,400. Duration from breaking ground to certificate of occupancy was 13 months.

Judge Sommer awarded Lazzaro only $33,840 plus costs and attorney fees. Of that, WGB admitted $32,000 was due as a refund. Lazzaro v. Deverin, December 6, 2019

If you have a client who insist on a hard deadline for completion, have a look at Construction Contract Writer. Discover how easy it is to protect against unreasonable expectations.