Essential Contract Terms

Don and Molly Krumwiede had a serious house fire a few years ago. Their home in Allamakeen, IA was a total loss. Fortunately, Don and Molly had full insurance, including up to a year of living expenses while their home was rebuilt.

What Don and Molly needed next was a contractor. They met with Tim Kruse of Kruse "N" Bries Construction. Kruse brought along a plan book from the building material dealer Menards. Don’s choice was a plan called The Woodsman. Kruse went back to Menards for a detailed set of plans for The Woodsman. A few days later, Kruse came back with a five-page labor and material list for the new home: excavation, footings, framing, electrical, plumbing, heating, siding and so on. At the bottom of the last page, on a line titled "Total Materials and Labor" was the price $175,000. But the $175,000 was crossed out and replaced, in handwritten numbers, with “$190,000.” Under that total, typewritten in all capital letters and heavy bold type, were the words, "This is a bid not an estimate. 50% down payment required.”

The Krumwiedes liked the proposal and agreed to have Kruse "N" Bries build their house for $190,000. Molly and Don advanced $92,000 and Kruse started work. That was November 2012. But there was a problem.

Other than the material list, down payment and total price, there was nothing in writing: No start date. No completion date. Nothing about plans or specs. No payment schedule. Not a word about changes. In fact, the 5-page material list didn’t even mention The Woodsman.

As work progressed, payments to Kruse reached $168,000 including the initial $92,000. But in August 2013, when Kruse asked for the next payment, the Krumwiedes balked. Work was far from finished and their year of living-expense reimbursement was running out. With no more money coming in, Kruse "N" Bries stopped work and sent a final bill for $69,500. When the Krumwiedes didn’t pay, Kruse "N" Bries sued for $96,815.

What Should the Court Do?

Before deciding, here are a few things you should know:

• Don and Molly hired other contractors to finish the work. Their total cost for the home, including what was paid to Kruse "N" Bries, was about $250,000.
• While suit was pending, Don Krumwiede took a job in another state. He sold the new house, about half their acreage and existing outbuildings for $330,000.
• Testifying in court, Kruse claimed to have done work beyond the original bid of $190,000: a two-car garage instead of one, more living space above the garage and a walk-out basement.

Now take a guess at how much the court awarded Kruse “N” Bries on their claim for $96,815.

The trial court awarded the contractor exactly nothing -- zero. And last month the appellate court agreed. (2019 Iowa App. LEXIS 329) Here’s why. The court couldn't be sure what the contractor had agreed to build or when the owner had agreed to pay. For example:

• Kruse “N” Bries insisted the Krumwiedes breached the oral contract when they refused to make a payment in August 2013. The court didn’t agree. Nothing in the agreement set when payments were due.
• The court couldn’t identify anything the Krumwiedes received that they were not entitled to. The 5-page bid didn’t make clear what Kruse “N” Bries promised to build. For example, the plan for The Woodsman showed a one-car garage. But the 5-page bid didn't refer to The Woodsman and the permit issued for the job specified a two-car garage.

An Expensive Lesson Learned

Construction is complex. The contract for any job is like a road map -- getting you from where you are to where you want to be. Without a good map, expect a result like what happened to Kruse "N" Bries.  Construction Contract Writer makes it easy to draft letter-perfect contracts that cover all the essentials. The trial version is free.

Facts Win Cases

Every contractor has experience with construction disputes. Potential arguments (and court cases) lurk on every job site. When a dispute pops up, it’s not enough to insist, “Oh no, you told me . . .” You need hard facts:

•           Correspondence, written or e-mailed

•           Notes on conversations, directions and decisions

•           Minutes from job site meetings

•           As built drawings with dimensions

•           Inspections, tests, logs and reports

•           Responses to requests for interpretation.

The more complex the job, the more facts you’ll need to win any dispute. My architect friend Bill Mitchell tells a good story that illustrates the point – and offers a tip any contractor can use. Bill’s story starts with a job in San Francisco.

The next time you’re in San Francisco, walk through Neiman-Marcus store on Union Square. A central atrium runs the full height of the building. At the top of the atrium, a gorgeous stained-glass rotunda spans the entire space. I’ll let Bill pick up the story from here.

In 1984, I was about the eighth project architect hired to restore this rotunda after years of neglect. When I got involved, construction was already under way. My job was to oversee design. If you haven’t been to Union Square, I should point out that the Neiman Marcus rotunda is about the same size as the dome on most state capitol buildings.

The job had issues, and I really mean issues. The first problem was budget. The original rotunda consultant took his share and split, leaving me to complete the project on a shoestring. The next problem was materials. Reconstruction had to use as many of the original plaster pieces as could be salvaged. The dome had been broken out with crow bars and axes, trucked across the bay to Oakland on an unpadded flat-bed truck and then dumped in a public storage facility. There the pieces remained for eleven years while zoning and plans for the store crawled through layers of public approvals. Over those eleven years, souvenir-hunters helped themselves to armloads of the ornate antique plaster pieces. That’s when I got involved.

My inventory of the plaster parts revealed that only half the rotunda remained. The other half had vanished. I set up a plaster fabrication shop, did the shop drawings, and had crews start molding the missing plaster pieces. In the meantime, the general contractor was erecting the rest of the building around us.

The project was awash in design, construction and political intrigue. Any job like this attracts prima donnas – and their lawyers. I hated going to work. The entire site was thick with resentment, complaints and animosity. I couldn’t possibly keep written notes on all that. I had to innovate.

I bought a small hand-held tape recorder and a bag of blank tapes. (Remember, this was 1984.) Every day, hour by hour, minute by minute, I recorded everything that happened on that job: descriptions of the work, the people, the meetings, the attitudes, the refusals to cooperate, every verbal dispute, theft of our new plaster castings, everything. I made what had to be the most complete audio archive ever prepared for a construction project.

We finished the job in time for the grand opening. The rotunda was beautiful – and still is. Have a look the next time you’re in San Francisco. But, as I expected, blame ran hip-deep at project closeout. My company hired a defense firm to fend off legal attacks. When lawyers asked for my files and notes, I was ready. For months, my secretary had transcribed my audio recordings – over 200 pages of day-by-day, moment by moment, blow by blow accounts of the design and construction process as it actually happened. Everyone involved in that project had egg on their face. Clearly, no one was blameless. And that, to my relief, was the last we heard from opposing counsel.

Collecting the facts is much easier today. All you need is a cellphone. Just punch the record button. When you get into a dispute, let your cellphone do the talking.

Even better, work under a contract that resolves issues in your favor before they happen. The section “Responsibilities of Owner” in Construction Contract Writer will do that. The trial version of CCW is free.

Contractor Without a Contract

Nearly all public works projects are done on terms set by the public agency. The contractor has little or no say in the matter. It’s only on smaller residential and commercial jobs that contractors get to shape the agreement – offer terms likely to save the day if the job goes bad.

It should be obvious: Contractors with an opportunity to write their own agreements should jump at the chance. Yet, some don’t. Here’s an example:

Jennifer English needed some improvements to her home in Wallingford, Connecticut. Jonathan Ohr of Major League Builders agreed to do the work for a flat $50,000. There was no written agreement. According to Judge Abrams, “Mr. Ohr was not in the practice of entering into written contracts with his home improvement customers.” You can probably guess what happened next. The case is English v. Ohr, 2018 Conn. Super. LEXIS 5898.

With $46,800 paid and work still to be done, Ms. English locked her contractor off the site. The court didn’t explain what went wrong on the job. But the judge agreed that: (1) Mr. Ohr could have completed the job if he had access to the site. (2) By denying access, Ms. English committed an anticipatory breach of the verbal agreement.

Normally, that would entitle the contractor to damages and probably attorney fees. But remember, there was no written contract for this job. And that was a problem. Connecticut is one of the 31 states and the District of Columbia that require a written contract for residential work: AR, AZ, CA, CT, DC, DE, HI, IL, IN, KY, LA, MA, MD, ME, MI, MS, ND, NH, NJ, NV, NY, OH, OR, PA, RI, TN, TX, VA, VT, WI, WV and WY.

It Gets Worse

Under Connecticut’s Home Improvement Act, doing work without a contract is an unfair trade practice. That authorized Judge Abrams to award punitive damages against both Mr. Ohr and Major League Builders. The judge didn’t do that. But the court’s opinion leaves no doubt about who was at fault in this dispute. If Ohr had a signed contract:

[T]he parties would have had a concrete memorialization of the scope of the project that would not have allowed for inconsistent expectations. As a result, the project could have been completed without significant incident and this litigation avoided.

In essence, the lawsuit was Ohr’s fault. So Ohr was ordered to pay the reasonable attorney fees of Ms. English.

Notice how absence of a written contract on the English job changed everything:

• According to Judge Abrams, there was no true agreement on what the job required.
• Ohr didn’t collect the last $3,200 due under his oral agreement.
• Ohr didn’t have the protection any good contract would have provided.
• Ohr had to pay both his own attorney fees and the fees of Ms. English.

Jonathan Ohr isn’t the only contractor to do business on a handshake. If that’s how you operate, have a look at Construction Contract Writer. Before you start any job, use CCW to write a construction contract that’s perfectly legal in any state where you build or remodel. The trial version is free.

Deletion Change Orders

Nothing I’ve seen causes contractors more legal headaches than change orders. If you’ve dipped into the pages of this blog over the last ten years, you’ve seen how changes in the work can spoil nearly any job. A New York case decided last month illustrates the point. Here’s what happened.

Lanmark Group, a New York prime contractor, won the bid to do nearly $15 million in improvements to the Vince Lombardi School in Brooklyn. Lanmark awarded the masonry part of the job to Graciano Corp. at a subcontract price of $5,320,000.

It didn’t go well.

Once work started, Lanmark and Graciano fell into bickering – mostly about delays. Graciano blamed Lanmark and demanded $500,000 more for extra shifts and supervision needed to stay on schedule. Lanmark didn’t agree. With the masonry about 30% done, Lanmark gave up on Graciano, issuing a change order that deleted most of the remaining work. Lanmark hired another masonry sub to finish what Graciano hadn’t. Graciano sued, claiming wrongful deletion from the contract. By way of defense, Lanmark cited clear language in the agreement with Graciano:

"[A]t any time, in any quantity or amount, without notice to the sureties and without invalidating or abandoning the contract, [Lanmark] may add or delete, modify or alter the Work to be performed under this Agreement.”

And that’s what Lanmark did, cutting Graciano out of most of the remaining masonry work.

You Decide

What should the court do? A change order deleting 30% (or any percentage) of the job was Lanmark’s right under their agreement. And courts are loath to re-write contracts. When the words are clear, contracts get enforced as written. But consider this: If a prime contractor can throw any sub off the site by issuing a deletion change order, what’s the value of any subcontract?

I like the way the court decided Graciano Corp. v Lanmark Group. Deletion change orders are perfectly legitimate. But there are limits. In this case, Lanmark’s change order eliminated too much of the work. In the words of the court, Lanmark altered “the essential identity and main purpose of the subcontract.” Graciano’s bid was for a “complete masonry installation.” After deletion, Graciano was left with only crumbs. The court ruled that Graciano could proceed to prove their loss.

Notice that the Graciano case involved a deletion change order. Back in March of 2013, I wrote a blog post about change orders for additional work. In that case, a contractor working at a Colorado ski resort got stuck in a cost + 10% contract. The owner issued change orders for more and more work, many extra weeks, all to be billed at cost + 10%. The contractor wanted out of the deal. He was locked into working for wages at a time when good work was plentiful at better markups. The court in that Colorado case turned the contractor free, citing the “cardinal change” rule. Changes to a contract have to be within the general scope of the agreement and have to be relatively small. Large changes (or too many small changes) are considered a cardinal change and have to be the subject of a new contract.

I believe the cardinal change rule works well for both deductive and additive changes.

Now Watch This

A few minutes studying the contract could have saved Graciano a major headache. I hope you wouldn’t sign any contract that allowed the other side to make changes at will without negotiation. That’s elementary. And it’s just the beginning. There’s plenty more to know about staying out of trouble with change orders. It’s all at your fingertips with Construction Contract Writer. The trial version is free.

Let Sleeping Dogs Lie

Fire damaged Terry Bridgwood’s home in Newburyport, MA a few years ago. Cost of repair was over $40,000. Apparently, the fire started in a ceiling light fixture. That’s strange. Light fixtures shouldn’t start fires. Her attorney agreed and did some checking.

As it turns out, Ms. Bridgwood’s home had been included in an October 30, 2000 housing rehab program run by the City of Newburyport. The prime contractor was A.J. Wood Construction. Electrical sub was Anthony Caggiano. Work was completed by January 2001. The fire happened eleven years later, January 2012. Nearly four years after that, January 2016, Ms. Bridgwood filed suit against Wood and Caggiano.

You Decide

How long can a contractor be held responsible for construction defects? Is 15 years too long?

Before deciding, understand that Ms. Bridgwood had some compelling facts on her side: The original contract required A.J. Wood Construction to take out a permit, comply with all building and fire codes and inspect the work on completion. That’s not exactly what happened. There was no permit for the ceiling fixture work. Neither Wood nor Caggiano notified the Newburyport building inspector. As a result, wiring wasn’t inspected before the ceiling was closed up. Worse, installation of the ceiling fixture didn’t comply with any federal, state or local code.

What Did the Court Decide?

The trial court dismissed Ms. Bridgwood’s complaint as untimely. Fifteen years was too long to wait to bring suit. A.J. Wood was not liable for the loss. Neither was Caggiano. But that wasn’t the end. Ms. Bridgwood appealed. Earlier this year, the Massachusetts Supreme Court took up the case.

A bit of history: Before 1968, Massachusetts contractors were responsible for their construction defects essentially forever. Builders could be held liable for their mistakes for their entire professional life and into retirement. Projects were never truly closed out. That made construction contracting in Massachusetts a hazardous occupation. In response, the legislature adopted a statute of repose -- let sleeping dogs lie. After some period, 6 years in cases like this, owners lose their right to sue builders for construction mistakes. That made sense. Ms. Bridgwood’s ceiling fixture seems to have worked fine for 12 years. She was in control of the premises for that period. A. J. Wood never set foot on site. Anything could have happened to that ceiling fixture in the dozen years after Wood and Caggiano finished work. The Supreme Court agreed that twelve years was too long. Massachusetts’ statute of repose barred Ms. Bridgwood’s claim for negligence.

But Ms. Bridgwood’s attorney had another arrow in his quiver: He claimed that Wood’s and Caggiano’s work on the ceiling fixture was more than simple negligence. What they did was an unfair or deceptive act under Massachusetts consumer protection law. That law carries a four-year statute of limitations that runs from the time the defect was discovered or should have been discovered. That would have been the date of the fire, 2012. So Ms. Bridgwood’s attorney claimed the 2016 suit had been filed on time.

Three of the seven supreme court justices bought that argument. Those three would have put Massachusetts contractors back where they were fifty years ago. At least for defects that fell into the category of “unfair or deceptive act or practice,” the statute of limitations wouldn't start running until the defect was discovered. Potential liability would follow a contractor for his or her lifetime. A project could never be truly closed out.

A bare majority on the court (4 of the 7 justices) ruled that Bridgwood’s suit had the “gist” of a tort claim, not a consumer fraud claim. So the 6-year statute of repose started running in 2001 when work was completed, not the 4-year statute of limitations from the date of the fire, 2012.

Wood and Caggiano won, just barely. But be aware of this: Massachusetts and many other states let contractors create a private limitation period shorter than set by statute. You could write contracts with a specific time limit on claims. Don’t rely on courts to do that for you. For help writing a private statute of limitation into your contracts, have a look at ConstructionContract Writer. The trial version is free.

Trends in Home Appraisal

A letter from an experienced Vermont appraiser crossed my desk last month. He wanted to know how Craftsman’s appraisal tools handle several trends in residential construction. Good question.

Energy-Conscious Design

This VT appraiser asked how Craftsman adjusts costs for homes with superior energy packages. In his experience, homes built to minimize heating and cooling loads cost from 5% to 15% more than conventional homes. I won’t commit to those numbers. But I agree that homes built today offer buyers more opportunities for energy-saving upgrades. Case in point: Last May, Maryland started requiring builders to tell their clients about tax credits for energy-efficient options. (Maryland Business Regulation Code § 4.5-603.)

Still, evolving energy standards are nothing new. Home builders have been on an energy-conservation binge since at least the oil shock of 1973. Craftsman published the Minimum Energy Dwelling in 1977. Since then, residential energy standards have improved every year. What was cutting edge design ten or twenty years ago is the bare minimum now. Our frame of reference has changed.

My recommendation: evaluate energy-efficient design the same way you would appraise better quality anywhere in a home. Craftsman’s appraisal tools offer six quality choices, from Minimum to Luxury, for each of the dozen major parts of a home, from foundation to roofing. When you see built-in energy savings, boost the quality rating on that part of the home. I’ll be surprised if the increase doesn’t fall in the 5% to 15% range.

One possible exception: A PV solar array can add six figures to the cost of a home. But I wouldn’t routinely add the cost of installed solar to any home appraisal. Think of a solar home as you would of a home with a Ferrari parked in the garage. It doesn’t change the home value. The same with solar. The PV array on the roof is probably leased from a solar investment company. Most solar energy systems can be uninstalled and relocated elsewhere. And the useful life expectancy of solar add-ons is much less than the life expectancy of the home itself. That puts PV solar in the class of an above-ground pool, not a fixture that belongs in your appraisal.

Super-Luxury Homes

Every appraiser needs to know about these. Thirty years ago, nearly all homes were built like homes, not like five-star hotels. Now, every state has communities with super-luxury homes:

• Over 3,500 square feet of floor with a massive front entrance,
• Marble, quartz and glass everywhere,
• Over 100 built-in light fixtures,
• Cavernous rooms, 18-foot ceilings, no square wall corners,
• More bathrooms than bedrooms,
• Kitchen built-ins appropriate for the kitchen in a high-class restaurant.

These are homes intended to break the norms of residential construction.

That’s why Craftsman appraisal tools step up the game when a super-luxury home is detected. For example, try NationalAppraisal Estimator. Enter a floor area of over 3,500 SF, more than 10 building corners and luxury or semi-luxury class for each of the 10 quality categories. That elevates your appraisal to the super class. You’ll be counting building masses, not building corners. Your cost breakdown for that super-luxury home will be a step above conventional residential construction. Cost totals for finishes, design and engineering will be a much higher proportion of the construction cost.

If your focus is replacement cost rather than appraisal, have a look at Insurance Replacement Estimator. Like all Craftsman valuation tools, it’s backed by over 60 years of construction cost estimating experience.

What Makes a Good Home Appraisal?

Appraisals come in at least three flavors. The first is based on comps. What would a comparable property sell for in the same area? The second is based on expected revenue. That’s the most common way to appraise commercial properties. The third type of appraisal is the replacement cost. In some ways, cost-based appraisals are similar to construction cost estimates.

Contractors figure the quantity and cost of materials, the cost of labor and the equipment expense. Then they add fees, taxes and markup. That’s the contract price – and also the cost to the first owner.

The most accurate cost-based appraisal would be an exhaustive labor and material construction cost estimate. Few appraisers have the background, experience or patience to do that. Anyhow, estimates start with building plans. Appraisers seldom have the home plan. Appraisers have something better, the building itself.

Sometimes you’ll hear a cost-based appraisal called a valuation. No matter the term, work begins with a visit to the site: counting, measuring, evaluating, making judgments about replacement cost.

Professional Standards for Home Appraisal

Fannie Mae’s Uniform Appraisal Dataset sets the standard for residential appraisals. Appraisers working for Fannie Mae lenders evaluate the residence in two categories: (1) quality of construction and (2) condition of the home.

• Quality of construction can be any of six classes: Q1 (highest-grade materials and workmanship) to Q6 (lowest quality materials, serious deficiencies).
• Condition of the home can fall in any of six categories: C1 (newly constructed) to C6 (safety, soundness, or structural integrity compromised).

Appraisers agree that Fannie Mae standards improve reliability. But that’s not the whole story. Going through the Fannie Mae appraisal process still doesn’t answer the most important question, what’s the value of this building? And that’s where National Appraisal Estimator steps in.

NAE follows the Fannie Mae matrix – 6 quality classes and 6 condition categories. But the result is a neat cost-based appraisal with full audit trail that reads like a construction cost estimate. Labor, material and equipment costs are broken into 28 categories. Indirect costs and markup show up in five categories. All figures are adjusted to the Zip area and are based on current costs of both materials and labor. But there’s more.

Going One Better

Fannie Mae is content to let appraisers drop an entire home into one of six quality classes and one of six condition categories. No appraiser should be comfortable with that. Foundation, exterior and interior finish, roof, windows, doors, kitchen and bath deserve separate consideration. Quality of the floor and quality of the roof may be very different. No single number yields a fair representation. Likewise, condition of the home should be evaluated by category. What’s the condition of the roof? Of the floor? Of the windows and doors? National Appraisal Estimator does all that and more.

If you appraise home values, whether for lenders or for insurance purposes, have a look at National Appraisal Estimator.

Maybe best of all, NAE comes from Craftsman, the publisher of National Building Cost Estimator, relied on by estimators and appraisers for over 40 years. You’re not going to find a better, more reliable appraisal tool than NAE.