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

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

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

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

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

1. The date of the transaction.

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

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

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

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

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

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

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

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

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

 

Change Orders You Can Believe In

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

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

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

He should have asked sooner.

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

It Doesn’t Have to Be That Way

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

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

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

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

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

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

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

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

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

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

Contracting on a Handshake

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

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

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

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

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

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

And if you don’t have a written contract?

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

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

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

Lesson learned

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

Making Nice with Sandy

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

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

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

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

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

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

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

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

Now the Hard Part

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

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

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

Changes in Construction Contract Law

Twenty-five states have made changes in the last few months. Highlights follow. As you read down the list, keep a tally. How many of these changes make it easier to do business as a construction contractor?

Alabama – Owners have ten days to cancel residential roofing repair contracts if any part of the insurance claim is denied. Work can’t start until the claim is settled. Contractors are barred from negotiating the settlement. Effective August 1, 2012

Arizona – Contracts for repair of storm damage require specific notices and disclosures. Owners have three days to cancel after any part of the insurance claim is denied. Work can’t start until the claim is settled. The down payment can’t exceed 50% of the contract price. Enacted April 2012.

California -- No matter what the contract says, a 2% per month penalty plus attorney fees applies on retention wrongfully withheld. Operative July 1, 2012. Licensed contractors and subcontractors are prohibited from inserting into any contract either an indemnity clause or a waiver of lien rights which would be void under California law. Operative July 1, 2012. Residential construction consultants need a contracting license and have to comply with construction contract law. Effective January 1, 2013.

Delaware – Home construction fraud is now considered either a class B, D, or G felony or a class A misdemeanor. Approved July 20, 2012.

Idaho – Any contract clause which limits the right to sue in Idaho or limits the time to bring suit is void. Enacted April 5, 2012.

Indiana – On public works contracts, claims of subcontractors and suppliers to retained funds are barred once the public agency has settled with the prime contractor. Effective July 1, 2012. Pay-if-paid clauses in subcontracts will be enforced. Court decision on May 11, 2012.

Iowa – Contracts for residential work must include a specific lien notice. Omitting the notice voids all lien rights of the prime contractor. Effective January 1, 2013.

Kentucky -- Owners have five days to cancel residential roofing repair contracts after any part of the insurance claim is denied. The right to cancel has to be disclosed in the contract. Work can’t start and no payment is allowed until the claim is settled. Effective July 12, 2012.

Louisiana – Owners have three days to cancel residential roofing repair contracts after any part of the insurance claim is denied. The right to cancel has to be disclosed in the contract. Effective August 1, 2012.

Massachusetts – No claim for extras on public works projects will be approved without prior notice to the comptroller. Effective January 1, 2013.

Nebraska -- Owners have three days to cancel contracts for repair of residential roofing after any part of the insurance claim is denied. Contractors can’t offer to rebate any part of the deductible. Effective July 19, 2012

North Carolina –Submitting a false statement of charges for home improvement work is a misdemeanor and grounds for license revocation or suspension. Effective January 1, 2013

Ohio – The limitation period for making contract claims is reduced from fifteen years to eight years. But claims for defective work under a construction contract retain a ten-year limitation. Effective Sept. 28, 2012.

South Dakota – Owners have three days to cancel contracts for repair of storm damage to residential roofing after any part of the insurance claim is denied. Contractors can’t offer to rebate any portion of the insurance deductible. Effective July 1, 2012.

How many of these changes are contractor-friendly? None, in my opinion. All make it harder to do business. But there’s an easy way to stay legal, no matter what changes come your way. Have a look at Construction Contract Writer. The trial version is free.

 

Storm Damage Repair in Thirteen States

This isn’t about what happened on October 29. It’s about another storm, the rising tide of states that regulate contracts for repair of storm damage. A little more than a year ago, no state had special rules for insurance repair contracts. Now there are thirteen (by date enacted):

• May 24, 2011– Minnesota Statutes § 326B.811
• June 30, 2011 – Missouri Revised Statutes § 407.725
• July 1, 2011 – Official Code of Georgia Annotated § 10-1-393.12
• August 26, 2011 – Oklahoma Statutes Title 59 § 1151.21
• January 1, 2012 – Illinois Compiled Statutes, Title 815, § 513/18
• April 10, 2012 – Arizona Revised Statutes § 32-1158.02
• May 22, 2012 – Louisiana Revised Statutes § 37:2175.1
• July 1, 2012 – Indiana Code Annotated § 24-5-11-10
• July 1, 2012 – Tennessee Code Annotated § 62-6-601
• July 1, 2012 – South Dakota Codified Laws § 37-24-51
• July 12, 2012 – Kentucky Revised Statutes § 367.620
• July 19, 2012 – Nebraska Revised Statutes § 44-8603
• August 1, 2012 – Alabama Code § 8-36-2

If you repair storm damage in any of these states, your residential contracts have to comply with the new law. All thirteen states:

• Require a notice in the contract if any part of the work may be covered by insurance.
• Give an owner the right to cancel the job if any part of the claim is denied.
• Require a full refund within ten days if the job is cancelled.
• Impose serious penalties for failure to comply.

Storm repair law is different in each of these thirteen states. But the following four states are typical:

Arizona – Covers all repairs to a residence damaged by a “catastrophic storm” in a “specific area.” The owner has three days to cancel after an insurance claim is denied. Work can't start until the three-day period has expired. The contract has to include a copy of the repair estimate showing damage to be repaired or not repaired and any emergency repairs already completed. If repair of the roof is included, the contract has to describe the work and how the roof was inspected. The contractor is barred from negotiating settlement of the insurance claim. The penalty for non-compliance is revocation or suspension of a contractor’s license.

Kentucky – Applies only to repair of the roof system. The owner has five days to cancel after any part of the insurance claim is denied. The contract has to include a detachable notice of cancellation in duplicate. Prohibits any payment before the end of the cancellation period. Work done to prevent further damage is exempt. The contractor is barred from negotiating settlement of the insurance claim. Prohibits reimbursement of the insurance deductible.

Louisiana – Applies only to repair of the roof system. The owner has three days to cancel after any part of the insurance claim is denied. The contract has to include a detachable notice of cancellation in duplicate. Exempts emergency work if acknowledged in writing by the owner. Prohibits doing any work before the contract is signed. Violation of the law risks a fine of up to $1,000 plus costs and attorney fees.

Missouri – Applies only to repair of the roof system. Prohibits any offer to rebate the deductible. The owner has five days to cancel after any part of the insurance claim is denied. Exempts emergency work if acknowledged in writing by the owner. The contract has to include a detachable notice of cancellation in duplicate. A contractor who doesn’t comply can be slapped with an injunction, restraining order and a civil penalty up to $1,000.

And Now Comes Sandy

Expect to see similar laws enacted in many of the 24 states affected. If your state hasn’t acted yet, stay tuned.

I’ve got a suggestion for any contractor with too little time and patience to deal with every new law that comes along. Construction Contract Writer makes it easy to stay legal. And the trial version is free.

 

Construction Contractor or Consultant?

Change is inevitable, even in the construction industry. One of those changes is construction consulting, sometimes called CM (construction management) consulting – or CM for short.

Veteran builders will remember a time when residential contractors did most framing and finishing with their own crews. Today, a residential contractor with payroll is the exception. Most let subs handle nearly all work.

CM consulting takes this trend one step beyond. A CM contractor is a consultant to the owner, pure and simple. No subcontractors. No payroll. No payroll taxes. No risk. The CM recruits contractors and subs, schedules the work, orders materials, supervises the job and tells the owner when it’s time to pay bills. But all decisions and contracts are in the name of the owner. Simple and easy.

Now the Hard Part

Is a CM consultant a “contractor” for licensing and contracting purposes? Only a few states have decided the issue. Washington D.C. Code of Municipal Regulations § 17-3905.1 to § 17-3905.14 requires that CM consultants comply with standards set for general contractors. Tennessee (Lowrey v. Tritan Group Ltd., 2009 U.S. Dist. LEXIS 60312) and New York (Liberty Management & Construction v. Wasserman, 1996 U.S. Dist. LEXIS 4408) are the same. In nearly all other states, whether a CM consultant is a contractor is anybody’s guess. So if there’s no answer, you might ask, “Why should I care?”

Here’s why. Where contractors are licensed, an unlicensed contractor has no right to collect. So a CM with no contracting license might not be able to collect. That gets the attention of anyone working as a CM. But it’s only the beginning. A consultant needs only an employment contract – or no written contract at all. If your state considers CM consultants to be contractors, every CM agreement has to include the notices and disclosures required in construction contacts – up to 18 pages of fine print in some states. Without those notices and disclosures, the CM contract is probably void.

Maybe you’re beginning to understand the problem. Use the CM loophole and you risk getting pinched if the loophole closes without warning.

States have an interest here. They’re not going to let the increasing popularity of CM consulting knock state regulation of contractors into a cocked hat. California is an example. A March 2009 appellate decision (172 Cal. App. 4th 939) allowed CM consultant Fifth Day to collect from Bolotin like any contractor even though Fifth Day did not have a contracting license. To stop an end-run around licensing law, the California legislature clawed back. Last month, Governor Jerry Brown approved a revision of California Business and Professions Code § 7026. The law goes into effect on January 1, 2013. The new definition of “contractor” includes what every CM consultant does:

(A) Provides or oversees a bid for a construction project.

(B) Arranges for and sets up work schedules for contractors and subcontractors and maintains oversight of a construction project.

That settles it, at least in California and at least for home improvement work. Starting January 1, 2013, CM consultants in California need a contracting license and have to work under a legal construction contract. Expect other states to fall into line one by one.

Protect Yourself

The AIA and CMAA publish model CM contracts. Neither includes the notices and disclosures required by state and federal law. That makes these model contracts illegal for most jobs in most states. 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.