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.