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.

 

Paper Contracting

When you hear the term paper contractor, it’s usually in the context of someone being “only” or “just” a paper contractor. I believe this prejudice against general contractors working as consultants is breaking down. And for good reason.

What was known as paper contracting in the last century has morphed into construction management (CM) contracting in the 21st century. CM contracting is replacing traditional construction contract practice on many types of projects -- from the largest public and private jobs to small home improvement projects. Traditional construction practice (prime contractor and subcontractor) has disadvantages that every traditional prime contractor knows all too well: risk of loss, oppressive state regulation, warranty problems, construction claims and callbacks. Modern construction managers avoid most of these hazards by limiting their responsibility to what they do best -- construction management. CM contracts leave the construction headaches to others -- liens, trade disputes, slow payment, code compliance, inspections and government regulation.

What is a construction manager (a paper contractor)? That’s easy. A construction manager earns a fee as a consultant:
Reviewing the plans and specs.
Preparing bid packages and evaluating bids.
Checking insurance coverage.
Approving the proposed contracts.
Communicating with contractors and suppliers.
Monitoring day-to-day construction.
Keeping the owner informed of progress.
Approving payment requests.
Assisting with change orders.
Protecting the owner from construction claims.
Directing project closeout.

What's NOT included in a construction manager’s portfolio? That’s easy too. The construction manager earns a fee for consulting services -- period. The construction manager neither buys nor installs materials, has no contracts with the trades and pays no bills. The owner signs contracts with trade contractors, pays all the bills and holds installing contractors responsible for their work.

Most of a construction manager’s task will come as second nature to an experienced general contractor. What won’t come easy is the construction management contract itself. CM contracts are very different from traditional prime contracts -- and have to be drawn precisely to avoid problems with property owners, trade contractors, suppliers and state regulators.

The recent case of Thurber Lumber Co. v Marcario underscores my point. Joe Marcario agreed to manage construction of a new home for Don Nenninger in Suffolk County, NY. Marcario ordered materials from Thurber Lumber and recommended trade contractors for the job. Marcario forwarded bills from subs and suppliers to Nenninger and Nenninger paid those bills directly. That worked fine until Nenninger ran into trouble with financing and stopped making payments. Thurber Lumber sued both the contractor (Marcario) and the owner (Nenninger) for $59,391.51. 

The court didn't accept Marcario's claim that he was working as a paper contractor (consultant), not a general contractor. Marcario could have made his CM status clear by giving Thurber a summary of his CM (consulting) contract before placing the first order. A CM contract would have left no doubt that Nenninger alone was liable for materials delivered to the Nenninger job. But Marcario didn’t have a written CM contract. And that was Marcario's $59,391.51 mistake. 

The court found Marcario liable for materials Thurber Lumber delivered to the Nenninger job -- just as if Marcario had been the general contractor, not a consultant.

Moral to the Story
Don’t try CM contracting without a good CM contract. Construction Contract Writer drafts CM contracts legal in any state and for any type of work. The trial version is free. And if you need a good "hands on" guide to CM contracting, have a look at the book Paper Contracting. A PDF download is available for less than $30.