Checklist for Construction Contracts

Nearly all states require specific notices and disclosures in construction contracts. In some states and for some types of work, the list of required notices goes on and on. Worst case: California requires 35 separate notices in home improvement contracts. But anything your state requires is just the minimum. You contracts also have to cover the price, the site, the plans, etc. But plenty more could be in your contracts.

Here’s my list of optional topics for construction contracts. Scan through this list. Think of recent jobs where an extra sentence or two in the contract could have avoided an argument or saved some money.

Site safety, protection and emergencies.

• Who is responsible for project safety?
• Who is responsible for fire safety?
• What response is required in an emergency?
• Who is responsible for protecting new and existing work?
• Who supplies fencing and toilets?

 Hazardous materials.

• Any limits on use of asbestos, flammables or lead?
• Will explosives or welding equipment be allowed on the site?
• Who is responsible for hazardous materials discovered on site?

 Survey and layout.

• Who will do the survey and job layout?
• Who is responsible if there are errors in the survey?

 Permits, fees and taxes.

• Who applies for the permit and gets approvals?
• Who pays for permits and approvals?

 Utilities, cleanup and job sign.

• Who provides temporary utilities?
• Who arranges for permanent utilities?
• Who cleans the job site?
• Is a job sign either allowed or required?

 Role of the superintendent, architect or engineer.

• What is the authority of the owner's representative?

 Subcontracts and subcontractors.

• Can the owner reject subcontractors?
• What obligation does the owner have to subs?

 Use of the site and adjacent property.

• Any restrictions on use of the jobsite by the contractor?
• Does the owner have free access to the site?

 Responsibility for surprises in the job.

• Who is responsible for a mistake in the plans?
• Will the contractor get extra compensation for surprises?

 Changes in the work.

• Can the owner insist on changes at a set price?
• Are written change orders required?
• Who pays for changes required by law or a plan defect?
• Is there a formula for pricing extra work?
• What changes are charged to the owner?

 Warranties, defective work and callbacks.

• Can the owner reject work considered defective?
• What defects qualify for a callback and for how long?
• What warranty is included?

 Handling claims and resolving disputes.

• How will disputes be settled?
• Is a written notice of claim required?
• Is arbitration required?

 Liability for damage, indemnity and bonds.

• Who is liable for damage to the work?
• Will the contractor be liable for accidental losses?
• Will performance and payment bonds be required?
• What are the limits to liability?

 Contract boilerplate.

• Can rights under this contract be assigned to others?
• Do waivers have to be in writing?
• Does the owner have the right to audit records?
• Are there any limits to contract claims?

 Inspections and testing.

• Who schedules tests and inspections?
• Who pays for inspections and re-inspections?
• Is the contractor required to uncover work for inspection?
• What has to be in the written schedule?
• What types of delay by contractor will be excused?
• Will there be liquidated damages for non-excusable delay?
• Can the contractor collect for delay by the owner?
• How do we figure the cost of delay?

 Suspension and termination of the job.

• Does the owner have the right to terminate the job?
• Does the contractor have the right to stop work for non-payment?

 Completion.

• When is the job substantially complete?
• Will there be a punch list?

No contract has to cover all these topics. But at least consider these issues before submitting a contract for signature. The best way to be sure you touch all the bases: Construction Contract Writer. The trial version is free.

Mistakes in the Plans

I’m old enough to remember when plans were drawn by hand. A designer who wanted a particular detail had to physically draw that detail line by line, considering each line as it was drawn.

That’s not what happens today. A designer who wants a specific detail simply finds that detail in some old plan set. The designer clicks to copy and clicks again to paste into the current drawing. Little thinking is required. The result: All sorts of nonsense can end up in the plans. As the contractor, it's your job to find mistakes like this. First, I'll explain how. Then I'll explain why.

Bill Mitchell, an architect friend, recommends using a checklist to find design errors. Every item on this list has some impact on cost. 

The Six Cs of Plan Review

Examine each of these categories separately. First, look for anything that’s missing. Are the plans complete? Then do a second review to be sure plans and specs are consistent. Continue through the list one “C” at a time.

Complete – Are the plans an accurate and thorough representation of what’s intended? Is every detail that’s called out in a bubble actually drawn somewhere? Are enough sections shown to define the project?

Consistent – Is each sheet of the plans consistent with every other plan sheet? Are the plans consistent with what’s in the specs? Find yourself a light table. Overlay sheets on each other, one sheet at a time. Does the ceiling plan match the floor plan? Do light fixtures fall where air conditioning grilles are already located? Do plumbing vents on the roof pass through heating and cooling units?

Clear – Ambiguity in plans is the enemy of productivity. Good plans require the least improvisation. Are all key dimensions called out? As a contractor, you’re entitled to scale dimensions off the plans. But if there’s room for several interpretations of what’s required, do you bid the worst case or the best case? Plan details are usually the last step in the design process. A set of plans light on details will be heavy on change orders.

Correct – Begin by checking the length of one outside wall. Add up the chain of dimensions along the entire wall. Then check the full length of the opposite outside wall. Checking to the center of walls isn’t good enough. That makes the framer do the math. Be sure the two dimension chains match. If they don’t, it’s called a bust in the plans. When you’ve checked the length of all opposite outside walls, begin checking dimensions of inside walls. When you’re sure all wall lengths are right, start checking wall heights.

Constructible – Every designer is perfectly capable of drawing plans that can’t be followed at any reasonable cost. Be sure the plans allow enough space for trade contractors to complete their work. For example, does the plenum above a ceiling have space for both duct and conduit? In a residence, be sure framing details leave enough room for drain lines. If space is tight, your plumber, electrician or HVAC contractor will find a way. But you may not like the result.

Cost – Designers aren’t always sensitive to cost issues – either construction cost or the cost of maintenance. Favor materials that are readily available and that can be installed using conventional construction techniques. For example, almost all construction materials come with square corners. Building a semi-circular wall requires forcing square materials into a round shape. It can be done. But waste will run up costs with little benefit.

How to Protect Yourself

Architects and engineers use contracts that shift responsibility for finding design flaws to the contractor. You’ll see “verify in field” stamped on many plan sets. Whether you see “VIF” or not, both law and common sense give you, the contractor, at least shared responsiblility for errors on the plans. If you aren't eager to accept liability for mistakes by others, use Construction Contract Writer to shift liability back where it belongs. The trial version is free.

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.