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.

Questions for HomeAdvisor

If you do any residential work, you know the name. HomeAdvisor is a Web directory of local contractors. The idea behind HomeAdvisor is simple. Read what your neighbors say about contractors they know. Then get a quote from the contractor of your choice.

HomeAdvisor traces its roots back to Angie’s List. In 1995, Angie Hicks went door-to-door in Columbus, Ohio, signing up anyone who wanted to see her list of recommended contractors. In the first year, Angie got over 1,000 owners to pay a fee and sign-up. A business was born.

Soon Angie met a venture capitalist with access to millions in investor funds. You may not have heard of ServiceMagic, or Instapro, or MyHammer or HomeStars, or MyBuilder, or Handy. All offer an on-line list of contractors. And all are now part of HomeAdvisor -- listed on the NASDAQ as ANGI Homeservices, Inc.

Make no mistake, pairing up customers and contractors is big business. Home Advisor claims millions of subscribers (owners), more millions of paid members (contractors), $1.326 billion in annual revenue and ‎4,500 employees. Headquarters are in Denver, Colorado.

Those 4,500 employees are why you’ve heard of HomeAdvisor. When H-A discovers you do home improvement work, your business goes on their call list. Expect multiple calls from HomeAdvisor sales reps until you buy in.

With all that revenue from contractors, HomeAdvisor elected to turn their directory into a freemium service. Since 2016, any owner can scan the list of contractors and check the reviews. No cost. But contractors had to pay to get listed. And it’s not cheap. Annual charge is several hundred dollars plus a fee of $25 to $75 per lead. Contractors report paying $1,000 a month or more for the listing. Money well spent? Click here to read contractor comments. 

Worse Still

Until recently, HomeAdvisor only matched contractors with owners. The owner and the contractor had to strike a deal. Now H-A offers another option, “upfront” pricing:

• H-A quotes a fixed price for the work without ever seeing the job.
• H-A selects the tradesperson to do the work.
• H-A collects in full before anyone arrives on site.

Obviously, H-A has to limit these “upfront” jobs to small, simple tasks, like cabinet repair, patching walls or ceilings, replacing a plumbing or electric fixture or re-glazing a window.

If you’ve dipped into this blog any time in the last ten years, you’ll recognize some issues with H-A’s new “upfront” business model:

• H-A won’t reveal the names or numbers of tradespeople sent to do the work. There’s no way to check references or license status. Is that a little weird from a company built on contractor references?
• Any agreement to do construction work at a set price is a construction contract. Every state regulates home improvement contracts. Most states limit the initial payment and require written contracts with plenty of notices and disclosures. Where is the H-A written contract?
• Any time a tradesperson makes improvements to an owner’s primary residence, law in every state gives that tradesperson a construction lien. When work will result in a lien on an owner’s primary residence, federal law requires delivery of a Reg-Z notice – in duplicate. Where’s the three-day right to cancel?

In short, HomeAdvisor’s new “upfront” model ignores state law, violates federal regulations and defies common sense. Home Depot and Lowes don’t make mistakes like that. Installation services from both come with contracts that comply perfectly with both state and federal law.

My question: How long can a publicly-traded company like HomeAdvisor skate around state and federal law?

If you’re serious about staying legal, no matter the state or type of work, have a look at Construction Contract Writer. The trial version is free.