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.

Do CM Contractors Need a License?

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

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

Don’t answer that question before looking carefully at the licensing statute in your state. Usually the term construction contractor is defined very precisely. Sometimes that definition includes construction management and sometimes it doesn’t. For example, Washington D.C. Code of Municipal Regulations § 17-3999 requires that construction managers comply with all standards that apply to general contractors. The same is true in Virginia. VA Code Ann, § 54.1-1100.

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

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

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

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

Construction Contract Writer drafts CM contracts that comply with both federal law and the law in your state, regardless of the type of construction – residential, commercial or home improvement. The trial version is free.