New Laws Will Affect Home Builders

Residential contracting is a highly regulated industry. To stay in business, contractors have to comply with state and federal law. That’s not easy, at least partly because new laws are piled on every year. Right now, legislatures in twelve states are considering bills that would affect home builders and home improvement contractors. Nearly all of these bills add to your cost of doing business or risk of making a mistake.

Here’s my state-by-state rundown of residential contracting bills introduced in the last few months. Expect many of these bills to become law before too long.

• Connecticut – Senate Bill 319 would prohibit mandatory arbitration in home improvement and home construction contracts.
• Hawaii – Senate Bill 1077 will require residential owner-builders to deduct withholding tax and provide workers’ compensation insurance for anyone working on the job who isn’t a licensed contractor. (Effective 7/1/13)
• Iowa – Senate Bill 497 would require that contractors buy a $50,000 surety bond before agreeing to do any home improvement work. (Passed the Iowa Senate)
• Massachusetts – House Bill 194 would limit the down payment on most residential jobs to one-third of the contract price and require that the contract include a payment schedule.
• Maine – Senate Bill 459 would require that all residential contractors be licensed.
• New York – Assembly Bill 459 would require that home improvement contractors have a license and a surety bond. Assembly Bill 1081 would levy a $5,000 fine for violating the Home Improvement Contracts Act. Assembly Bill 1903 would allow owners to withhold up to one-third of the contract price until 15 days after completion of home improvement work.
• New Jersey – Senate Bill 2658 would make failure to complete a home improvement project a crime. Home improvement contractors would need a $25,000 surety bond.
• Pennsylvania – Senate Bill 686 and House Bill 1543 would permit time and material (cost-plus) home improvement contracts.
• Kentucky – House Bills 180 and 249 would set standards for all home improvement contracts. Any contractor who charges more than four times the fair price or misrepresents or conceals a material fact would be guilty of home improvement fraud.
• Kansas – House Bill 2065 creates the crime of home improvement fraud. (Passed the House)
• Wisconsin – Assembly Bill 81 gives owners the right to cancel contracts for insurance repair work if any part of the insurance claim is denied. Wisconsin and Utah will become the fourteenth and fifteenth states to enact laws requiring disclosure of the right to cancel a contract for insurance work if the claim is denied. For the first thirteen states, see my blog of November 30, 2012.

Even if your state isn’t on the list, be forewarned. New law is headed your way. To be sure your contracts meet standards that apply in your state, have a look at Construction Contract Writer. The trial version is free.

Is My Contract Legal?

Most construction contractors have a favorite agreement they use again and again. “My contract worked fine on my last job. It’s a good choice for my next job.”

I don’t necessarily agree. But I understand the logic. You don’t have time to negotiate contract terms on every job. You’re a builder, not a lawyer.

If that’s how you feel, OK. I’m not going to confuse you with the facts. But I’ll offer one point on which all can agree. If you have only one contract, make sure it’s legal. Too often, it’s not. Using a bad contract again and again is like walking a tightrope. Eventually you’re headed for a spill.

A case decided last week in Ohio illustrates my point, Garber v. STS Concrete Co., 2013 Ohio 2700. Frank Suglio runs STS Concrete in North Olmstead. Pat Garber needed repair work on his driveway, sidewalk and steps. A neighbor recommended STS. Frank bid the job at $6,200. Pat signed the STS contract and Frank did the work. Before too long, the concrete developed cracks. Pat wanted repairs. Frank wouldn’t do it. So Pat sued STS and won – not for the cracks but for a bad contract. The trial court awarded Pat three times the cost of job, $18,600, plus attorney fees of $5,524.24. Remember, this was for a $6,200 job!

What did Frank do wrong? The court never considered cracks in the concrete. Instead, the trial court judge came down hard on the STS contract. Notices required by Ohio’s Home Solicitation Sales Act were omitted. That was Frank’s $24,124 mistake.

But that wasn’t the end. STS appealed. This time STS won. The judgment was reduced to a full refund, only $6,200. Still, that’s a stiff price for a simple mistake.

Three Important Points

1. You’re on your own. It’s your responsibility to write contracts that comply with the law in your state. No state makes that easy.
2. Only a contractor gets penalized for a bad contract. Owners have no risk at all.
3. This isn’t simple. States have specific requirements that vary with the type of work: residential or non-res, pools and spas, insurance work, large jobs, small jobs, what’s included in the job, where the contract was signed. The list goes on and on.

So What Should You Do?
Here’s my suggestion. It’s quick, easy and free. Check you contract against contracts drafted by experts. The site is here. There's no charge for a free trial. Build a contract that meets requirements for your job and complies precisely with laws in the your state. Check your contract against the free trial version. It’s the best way I know to avoid what happened to STS Concrete. When you're satified that Construction Contract Writer is a better tool for drafting construction agreements, get the full program here.

Picking up the Pieces in Oklahoma

Losses from the Moore, OK tornado run into the billions of dollars. Over 12,000 homes have been seriously damaged or destroyed. Healing that loss will take years.

But unlike hurricane Sandy, most losses from the Oklahoma tornado will be covered by insurance. If you’re planning to do insurance repair work in Oklahoma, there’s some new law you need to understand. Oklahoma Statutes Title 59 § 1151.21 became effective in August 2011. Here’s your checklist.

ü  Owners have the right to cancel. If any part of the repair is expected to be covered by insurance, an owner can cancel the contract up to 72 hours after an insurance carrier denies any part of the claim.

ü  Notice in the contract. Your insurance repair contract has to include a disclosure in at least 10-point bold type.

You may cancel this contract at any time within seventy-two (72) hours after you have received written notification from your insurer that your claim to pay for the goods and services to be provided under this contract has been denied. See attached Notice of Cancellation for an explanation of this right.

ü  Cancellation notices. Duplicate cancellation notices have to be attached to the contract. The notices have to be in at least 10-point bold type and include the contractor’s name.

 NOTICE OF CANCELLATION If your insurer denies all or any part of your claim to pay for goods and services to be provided under this contract, you may cancel the contract by mailing or delivering a signed and dated copy of this cancellation notice or any other written notice to [Contractor Name] at [Contractor Address] at any time within seventy-two (72) hours after you have received written notice that your claim has been denied. If you cancel, any payments made by you under the contract will be returned to you within ten (10) business days following receipt by the contractor of your cancellation notice. I HEREBY CANCEL THIS TRANSACTION. [Date and signatures]

Failure to comply is a misdemeanor under Oklahoma law and could cost you $500 for each violation.

If even part of the claim is denied, the owner has 72 hours to walk away. After cancellation, you have ten days to make a full refund, no matter how much work was done. Starting work before the claim has been approved is like walking a tightrope. Plenty of risk.

What about Emergency Work?

The law makes an exception for emergency repairs done before the claim is approved. Even if the job is cancelled, you can collect the fair value of emergency work -- but only if acknowledged in writing by the owner to be necessary to prevent damage. Don’t even lift a hammer without a signed statement: “I agree to pay $____ for the following emergency work _________.”

If you’re doing insurance work in any other state, be careful! My blog post of November 30, 2012 lists 13 states that have adopted similar statutes in the last three years. Texas is probably next.

But there’s no need to take risks on insurance repair work. Construction Contract Writer will protect your pocketbook no matter where you work. The trial version is free.

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.