E-Sign Your Construction Contracts

I’ve been asked, “Can I get my contracts E-signed -- send my contract to a client as an email attachment, get an electronic signature and then have the E-signed contract emailed back to me?”

The short answer is “Yes.” And it makes good sense. If you draft contracts with your computer, it’s easy to get E-signatures from clients. No printed contract required. No program to install on your computer. It’s quick, costs nothing extra and is perfectly legal. If you’re E-filing tax returns, you’re already E-signing documents. If you haven’t tried E-signing construction contracts yet, you’ll be surprised at how convenient it can be.

To Get Started E-Signing

Search on the Web for “Free E-sign.” You’ll find a dozen or more vendors offering free or low-cost ways to E-sign contracts. I’ll use OneSpan to explain how it works. There’s no charge if you E-sign ten contracts or less per month.

Start with a contract in either PDF or RTF (MS Word) format on your computer. If you use Construction Contract Writer, that’s easy. Then go to OneSpan.com. Enter your email address and name to create a new account. Assign a secure password. (Security is an important issue when E-signing.) Then click to create an E-sign Room. You’ll need one E-sign Room for each contract. Give the room a name, such as “Jones Contract.”

Now you’re ready to upload the contract to be signed. Click “Add document” and then “Browse” to find the contract on your computer. Click to upload. When the upload is complete, click on the contract file name. You’ll see the full document.

Now identify who is going to sign the contract. Click “Add signer” and enter the email address and name for each person who will be signing. Scroll down the contract to where a signature is needed. Click “Add Signature.” Then drag and drop the signature block on the signature line. Do the same for each signature in the contract. When done, click “Send.”

Each signer will receive an email notice that the contract is ready to E-sign. Each signer clicks a link in the email message to see the contract. Then click the yellow sticky note in the contract to add a signature and the date. When you and your clients have signed, all get an email notice and can print the contract. Simple.

A few points to note:

• E-signing won’t work for anyone who doesn’t use email and the Web.
• You can draw a “signature” with your mouse. But a written signature isn’t required.
• A new E-sign customer has to create an account before E-signing the first time.
• Be sure to drop a signature block everywhere a signature is needed in the contract.
• Don’t send a contract out to be signed until it’s exactly the way you want it.
• Any attempt to alter a signed contract will invalidate the digital signatures.

Another important point. Consumers have to receive a disclosure notice and E-sign a consent form before E-signing their first contract. Both the notice and consent form can be delivered automatically with the first contract.

Why Contractors Like ADR

Construction disputes usually start with a surprise – something nobody considered. A good contract anticipates the most likely surprises. But no contract is perfect. Occasionally you’re going to have a dispute.

If you write the contract, you decide how disputes will be settled – either in court or by arbitration. If your contract requires arbitration, usually called alternative dispute resolution or ADR, the arbitrator’s decision will be final. There’s no right to sue. That can be an advantage. Arbitration is usually faster and cheaper than litigation. Many arbitration cases are decided on written statements alone. Statistics show that merchants usually win and property owners usually lose in arbitration. That makes arbitration a good choice for construction contractors. An arbitration clause in your contract adds leverage when an owner (or the owner’s attorney) threatens to sue.

But There’s a Problem.

Eleven states void any arbitration agreement in a residential construction contract that omits disclosures required by state law:

• California -- Business & Professions Code § 719
• Illinois – Title 815 Illinois Compiled Statutes § 513/15.1
• Maryland -- Code of Maryland Regulations § 09.08.01.25.
• Massachusetts -- General Laws 142A, § 4.
• Missouri -- Revised Statutes § 435.460
• Nebraska -- Revised Statutes § 25-2602.02.
• Oregon -- Administrative Rules § 812-012-0110-1-f.
• Pennsylvania – Title 73 Pennsylvania Statutes Section 517.7
• South Carolina -- Code Annotated § 15-48-10(a).
• Texas -- Property Code § 420.003.
• Vermont -- Title 12 Vermont Statutes Annotated § 5652

The disclosure statement required is different in every state: the exact words, all upper case, underlined, signed or above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to be enforced. That’s a trap for the unwary. Don’t get caught.

What’s in an Arbitration Clause?

No state or federal court will touch a dispute about a contract that includes an arbitration clause – an agreement to settle disputes using private ADR rather than public courts. Your arbitration clause should identify who will do the arbitration (such as the American Arbitration Association or Construction Dispute Resolution Service) and the arbitration rules that apply.

Federal law and policy favor arbitration. State limits and restrictions on arbitration, such as in the eleven states listed above, have been invalidated when the subject of the contract included interstate commerce. And nearly all construction includes materials from out of state. Still, the easiest and cheapest way to get into arbitration (and stay out of court), is to comply with your state law.

Construction Contract Writer makes that easy. If your preference is arbitration and if you do work in one of the eleven states listed above, get the trial download. It’s free.

Insurance Repair Work in Illinois

Starting January 1, 2012, residential contractors in Illinois have to jump through another hoop.

If any part of a job may be covered by insurance proceeds, section 513/18 of Illinois’ Home Repair and Remodeling Act will require a special notice in the contract and extra cancellation forms. Section 513/18 applies if:

• The work is on an existing residential building with from one to six units, and
• The work is valued at $1,000 or more, and
• Repairs are needed because of damage from a “natural occurrence” and
• More than one residence was damaged by this natural occurrence, and
• Part of the work may be covered by proceeds from property insurance.

If § 513/18 applies, a contractor:

1. Can’t offer a discount on the insurance work.
2. Can’t help the homeowner file an insurance claim.
3. Has to include a roofing contractor’s license number in the contract.
4. Can’t start work until the insurance claim is resolved.

This doesn’t make sense on several levels:

1. Contractors should be encouraged to give discounts.
2. Some homeowners need help preparing claim forms.
3. Not all catastrophe repairs require a roofer.
4. Homeowners need the right to start repair work before their claim is settled.

Ready, Fire, Aim

Illinois has a reputation for legislating first and regretting it later. Until the Home Repair and Remodeling Act was “fixed” last year, a violation of the law left contractors with no right to collect. For example, in Smith v. Bogard, a contractor who forgot to give an owner the state’s two-page consumer protection brochure lost all rights: The contract was unenforceable, lien rights were void and there was no recovery for unjust enrichment. That opened the door to all kinds of mischief by owners operating in bad faith. The Illinois State Bar, the office of the Illinois Attorney General and the legislature in Springfield stewed about that for a while and decided that wasn’t what they intended. So HRRA was “fixed” last July, allowing enforcement of lien rights and recovery for unjust enrichment.

Now comes the new section 513/18. Sub-section (f) requires a boldface notice in the contract. Sub-section (g) requires a new cancellation form – in duplicate – attached to the contract. This is in addition to the usual Reg. Z (three-day) cancellation form. I have no problem with either the notice or the attachments. Contractors know their contracts have to be letter-perfect. But there will be unintended consequences from sub-section (e). An owner has the right to cancel the contract at any time up to the earlier of:

• Five days after the insurer has denied any part of the claim, or
• Thirty days after the homeowner has delivered a proper proof of loss to the insurance carrier.

After cancellation, the contractor has ten days to make a full refund – even if repairs are already complete!

So what’s an insurance repair contractor supposed to do? I have three recommendations:

1. Write the contract now. But don’t start work until the insurance claim is settled.
2. If only part of a job is covered by insurance, put that part on a separate contract. Write another contract for the remainder of the job. Start work on the non-insurance work when you’re ready.
3. Explain section 513/18 to the owner. Until the carrier settles, your hands are tied. All you can do is prevent further damage – but only if the owner agrees in writing.

As long as there’s a right to cancel, repairs are on hold. That benefits no one. Better to let an owner acknowledge in the contract that their insurance claim may be denied. Then get on with the work. A “fix” like that benefits everyone. But until the legislators in Springfield make that change, Illinois contractors have to follow the law as written.

If you’re using Construction Contract Writer, your program will revise automatically when the new Illinois law goes into effect. If you’re not using Construction Contract Writer, the trial version is free.

A.I.A. Contracts vs. ConsensusDOCS

In April 2009, Bennett Builders signed a contract to remodel the Stamford, CT home of Tarun Mehta. It was a cost plus job at a price not to exceed $446,900. Under the agreement, work was to be completed by October 2009. Over a year later, work still wasn’t done and Mehta terminated the agreement. Bennett filed suit for $31,754.94 still due on the contract and asked the court for a pre-judgment remedy, an attachment of $32,000 on Mehta’s home.

This should have been a good job for Bennett Builders. They stood to earn a fee of $31,500. Even if the court denied payment in full under terms of the contract, Bennett should have been able to collect for the value of materials and labor that went into the job. Unfortunately, it didn’t work out that way. Bennett had made a serious mistake, using an A.I.A. contract.

The 17-page contract Bennett and Mehta signed was essentially the American Institute of Architects ("AIA") Document A107-1997 "Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of a Limited Scope Where the Basis of Payment is a Stipulated Sum." Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble. That’s exactly what happened to Bennett Builders.

On September 23, 2011, the Connecticut Superior Court denied Bennett Builders any relief – nothing under the terms of the contract and nothing for the value of goods and services that went into Mehta’s home. Why? The law is clear. Connecticut’s Home Improvement Act and Connecticut’s Home Solicitation Sales Act require a notice of cancellation in at least 10 point bold type. The A.I.A. contract doesn’t comply with Connecticut law and won’t be enforced by Connecticut courts. You can read the case at 2011 Conn. Super. LEXIS 2481.

I’m often asked to make a recommendation. Which is better for builders, A.I.A. contracts or ConsensusDOCS? I can’t recommend either. Neither includes the notices and disclosures every state requires in construction contracts. These notices vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. 

To avoid sharing the fate of Bennett Builders, take a look at Construction Contract Writer. The trial download is free – and complies precisely with both federal law and the law of your state.

Truth-in-Lending for Contractors

Most contractors don’t get into the money-lending business – at least not on purpose. Contractors want to be paid in full when the work is done. But at least occasionally, you’re going to bump into the Federal Truth-in-Lending (T-I-L) Act.  Here’s how it happens:

You’re bidding a job for a homeowner and:

• Offer to take an IOU for part of the job, OR
• Agree to stretch out payments after work is done, OR
• Recommend a lender.

On purpose or by accident, that puts your bid under the T-I-L Act. Fail to make the required disclosures and you’re liable for both the overcharges and your client’s attorney fees. That’s not what any contractor wants.

Offering credit is powerful stuff. It can help close any deal. Everyone knows that. And it’s just as true for construction work as it is for any major purchase. Banks, finance companies and car dealers are good at T-I-L compliance. That’s their business. You’ve seen the pages of fine print. If you want to offer credit as part of your proposal, here’s what T-I-L requires:

• The name of the creditor.
• The cash price if paid on completion.
• The down payment and all other payments prior to completion.
• Any other charges, fees, credits or deductions.
• The interest rate on the amount financed.
• The amount financed.
• The finance charge in dollars.
• The annual percentage rate (APR) used to figure the finance charge.
• The number of payments.
• The amount of each payment.
• The due date for each payment.
• The total of all payments.
• The total sale price including the finance charge.
• The charge for late payments.
• The pre-computed finance charge, if any.
• Whether there is a prepayment penalty.
• Whether the loan is assumable.
• What secures the loan.
• When the finance charge begins to accrue.

Note that these disclosures have to be in the construction contract any time you recommend a lender – even if T-I-L disclosures are also in the note prepared by the lender.

Most contractors aren’t eager to deal with this level of detail. You’re well advised to get help the first time you venture into T-I-L territory. One good source: Construction Contract Writer does all the work for you – figuring the APR and making all required disclosures right in the construction contract. The trial version is free.

Contracts for Insurance Restoration

Last week I had a chance to interview Paul Bianchina, author of the book, Insurance Restoration Contracting. Excerpts from that interview:

Moselle: What's different about insurance repair contracts?

Bianchina: Insurance carriers expect nothing but professionalism from their contractors. If you want to do insurance work, plan to comply with every local, state, and federal law. Insurance policies comply with the law. Insurance carriers expect restoration contracts that are just as good.

Moselle: Restoration contractors work for the property owner, not the insurance company. Is the insurance company involved with the contract at all?

Bianchina: Not directly, but just about everything the restoration contractor does reflects back on the insurance company.  So the contractor - and the contract - has to solve problems, not create them.

Moselle: Any other differences in insurance work?

Bianchina: Sure. Insurance restoration is complex. Nearly everything should be in writing.

Moselle: You better explain that.

Bianchina: For one thing, insurance companies initially want bids for just the visible damage. Supplemental damage estimates may come later, after work starts. Every change in the scope of work requires a contract change. If you expect to get paid for supplemental work, you better document every change and get a signature.

Another difference: Insurance losses create opportunities for an owner - a chance to make improvements. Nothing wrong with that. But insurance carriers won't pay for "betterment." So you have to break out covered losses from what gets done on the owner's dime. Done right, these changes are good work for a restoration contractor. Done wrong, you're in a dispute or worse. Documentation is the key. Separate everything that's insurance-related from what's done at the owner's request. Good documentation guarantees payment.

Moselle: Insurance restoration jobs have a higher profile than other types of work. Any thoughts on that?

Bianchina: True. You have the homeowner watching, the insurance company watching - sometimes more than one insurance company.  City and county officials tend to keep a close eye on fire loss jobs.  If the site of the loss is a crime scene, law enforcement personnel will be involved.

Everyone has their own interest to protect. Everyone can hire their own lawyer: the insurance company, the real estate company, the driver who hit the house, the owner, the city, the building department. When lawyers get involved, you better have the best possible notes and paperwork - including your contract.

Another caution: Many states now require that a seller disclose any significant damage to a home. If there's been a fire or water loss or mold remediation on site, that has to be disclosed at the time of sale.  As a restoration contractor, expect to be asked about repair work you've done. And plan to show that all work was done by the book.

Moselle: What else can go wrong?

Bianchina: Owners don't always play by the rules. Some can't resist temptation when the settlement check arrives. Again, a legally enforceable contract can save the day.

Moselle: Any more advice for restoration contractors?

Bianchina: Don't think of yourself as just a guy who's banging nails. Never lose sight of who you are.  You're called a contractor for a reason.  Don't start any job without a legally enforceable contract. In my opinion, anyone doing work on a handshake - or even a two-page boilerplate contract form - is simply asking for trouble.

Moselle: Good advice, Paul. Thanks.

Paul's book is available as a PDF download for under $35. Recommended.

Click here to have a look at the best construction contract drafting tool available on the Web. The trial version is free.

Changes in Construction Contract Law

Every state sets standards for construction contacts. For residential work, most states require very specific notices and disclosures. Heavy penalties apply to contractors who ignore these requirements. 

Contract requirements in your state depend on the type of job (residential or commercial), the value of the job, where the contract is signed and whether it’s a prime contract or a subcontract. Even experienced contractors can make a mistake – especially when laws change. And change happens often, as the list below demonstrates.

In the last few months, 22 states have made at least minor changes in construction contract law. Here are the highlights:

Arkansas Nearly all arbitration agreements are now valid. Arkansas Code Annotated § 16-108-206. The maximum interest rate is no longer limited to 5% above the Federal Reserve Discount Rate. Arkansas Constitution, Article 19 § 13(a).

California The insurance disclosure required for home improvement work has changed. California Business and Professions Code § 7159. The mechanics’ lien warning required on residential jobs will change on July 1, 2012. California Business and Professions Code § 7164

Illinois The definition of aggravated home repair fraud includes an act against anyone age 60 or more. 815 Illinois Compiled Statutes § 515/5.

Mississippi Contracts for residential work must disclose (in bold type) the contractor’s general liability insurance coverage. Code of Mississippi Rules § 50-023-002.

Minnesota Contracts for residential construction must include written performance guidelines. Minnesota Statutes § 327A.03.

Oklahoma Effective 11/1/11, retainage on public works jobs is limited to 5%. Oklahoma Statutes Title 61 § 113.1 Roofing contracts must now show the contractor’s registration number. Oklahoma Statutes Title 59 § 1151.17C

Oregon Retainage on private jobs can’t exceed 5% even if there is no completion bond. Oregon Revised Statutes § 701.420(1)

Washington Retainage on public improvement projects can’t exceed 5%. Revised Code of Washington § 60.28.011. No matter what the contract says, failure of an owner to reveal a known underground obstruction makes an owner liable for the extra cost, damages and attorney fees. Revised Code of Washington Section 19.122.040. [Effective January 2013]

If you use Construction ContractWriter, your program updates automatically to comply with these revisions in the law. Others would be well-advised to check their contracts for compliance.