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.

New Law for NY Roofers

Every contractor doing roofing or siding work in New York got a new challenge last month. NY General Business Law, § 770(8) and § 771-b set new standards for roofing and related work. To earn the right to collect on the job, your contract has to include new disclosures. The new law is fairly detailed. So stay with me.

Who’s Covered?

Every roofer working on an existing residential or non-residential building. But the definition of “roofing contractor” will be a surprise to many. A “roofing contractor” is any:

independent contractor, day laborer or subcontractor engaged in the business of roofing, gutter, downspout or siding services for a fee or who offers to engage in or solicits roofing-related services, including construction, installation, renovation, repair, maintenance, alteration or waterproofing

Nearly anyone doing work on the roof of an existing commercial or residential building is covered. For example, waterproofing, installing or repairing gutters or downspouts or replacing siding makes you a New York “roofing contractor”. New construction and demolition are excluded.

What’s Required of “Roofing Contractors”

This is where the new law gets down and dirty. A written contract is required. The contract has to include:

• All the disclosures required in NY home improvement contracts.
• The name of the contractor’s liability insurer.
• Confirmation of at least $100,000/$300,000 policy limits.
• Certification that the contractor will provide either (1) a certificate of workers' compensation covering all employees, or (2) A Certificate of Attestation Exemption (CE-200) from the Workers' Compensation Board.

Other Mandates of the New Law

• No payment is allowed until materials are delivered to the job site.
• Roofing jobs have to follow the plans and specs and have to comply with the applicable building code.
• Roofing contractors have to pay for materials and services used on the job once the contractor has been paid.

Special Requirements for Insurance Jobs

• The contractor can’t offer to pay or rebate any of the insurance deductible.
• The owner has three days to cancel the deal after any part of the claim is denied. There’s an exception for emergencies.
• No cancellation form is required in the contract. The deal is cancelled when an owner says the deal is off (by either registered or certified mail).
• Roofing contractors can’t negotiate terms of settlement with the insurance carrier.

The effect of all this is to make every New York roofing, siding or waterproofing job a home improvement project, whether the job is on a residence, apartment, store or office. That’s a major change.

Until now, commercial contractors didn't have to make the pages disclosures required in home improvement contracts: mechanics’ liens, trust funds, progress payments, hourly pay, right to cancel, right to receive a copy of the contract, insurance coverage. Now all that is required if work includes roofing or siding.

There’s good reason to comply with the new law. Technical violations earn a fine of $100. The civil penalty for substantial violations is $250 or 5% of the contract price for each violation. Worse, New York courts won’t enforce a roofing contract that falls short of what the law requires.

It's easy to write contracts that comply precisely with New York’s new roofing act – or the law of any state and for any type of project. Have a look at Construction Contract Writer. The trial version is free.

 

Surviving Past the Age of COVID

News Headline: US housing starts drop to the lowest level since 2015.

Government restrictions, lockdowns and a slowing economy have added a layer of problems for residential contractors. When work slows, income dries up. Expenses like debt service and overhead continue as if nothing had changed. Too much of that can stress any construction company.

Here’s a checklist to help your company survive long enough to thrive once again when the pandemic is history.

Cherish cash. Money to a construction company is like blood circulating in your veins. When the flow stops, no contractor lasts long. 

If you’re using advances and progress payments on the current job to satisfy creditors on prior jobs, you’re transferring debt. That’s like a game of musical chairs. When the music stops, as it has now for many, you’re stuck with bills that can’t be paid. My advice when cash is short: Use the money and credit that’s available to meet expenses on the current job. Keep materials and supplies coming and keep meeting payroll. Creditors owed on prior jobs will have to wait.

Be candid with those you can’t pay. Keep a list of creditors and the amount owed each. Tell creditors, “We’re short on cash right now due to the economy. I keep a list of who’s owed what. You’re on my list. No need to make threats. I promise to pay when cash is available. That’s the best I can do for now.”

That should satisfy some, at least temporarily. Others will threaten suit. Secured creditors will take back their security. Don’t let lawsuits bother you. Getting sued isn’t so bad. It’s the sign of a desperate creditor. Months will pass before anything actually happens. As time passes, most creditors will find a reason to compromise the debt, especially if you agree to make at least token payments. Other creditors may go belly up or simply give up trying to collect. Either way, you get months of breathing room and remain in control. The goal is to stay in business. You’re in survival mode. Keep working. Keep earning advances and progress payments on current jobs.

Focus on profits. When work is scarce, it’s tempting to look for larger jobs that can keep your crews and subs busy long term. Unfortunately, jobs like that are the most competitive and usually carry the slimmest profit margins. Smaller jobs often come with more generous margins. Larger, better-financed contractors can’t be bothered with the distracting trivia that’s common on small jobs. If you’re prepared to deal with picky, indecisive, argumentative owners, and if the profit margins look promising, consider stepping down a notch. Smaller jobs often come with shorter payment schedules and fatter margins.

Be selective. Don’t take on extra work just for the extra cash flow. No contractor loses money on every job and makes it up in volume. Doesn’t happen. More often, extra low-margin work results in extra headaches, especially when finances are tight.

Plan for the recovery. When too many contractors are chasing too little work, put your business in mothballs for a while. Construction contracting will pick up again. It always does. Use the idle time to do strategic planning. Where will the opportunities be when business revives? What skills and equipment do you need to capitalize on that revival? How will you finance growth of your company when the economy rebounds? Get yourself and your team ready to jump back into business. Have a plan. Focus on a particular job or area where success is most likely. Every major change in the economy creates pockets of opportunity. Change is coming. Commit to preparing yourself and your organization for that day.

A skill ever contractor needs: Writing contracts that comply with state the law and protect against the unexpected. For that, there's no better tool than Construction Contract Writer. The trial version is free.