When Do I Need a Contract?

Every construction project needs a contract. Thirty-one states and the District of Columbia require a written contract on all residential jobs: 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. 

Twelve states don’t require a written agreement but do require that the contractor deliver a set of written notices or disclosures before work starts: AK, AL, FL, GA, ID, KS, MN, MO, MT, OK, SD and WA.

And the other seven states? You still have to provide the written Federal 3-day right to cancel on nearly any residential job.

What Happens Without a Contract?

I’ll let a New Jersey case decided last month frame my answer.

Sharon Park planned to move from Illinois to New Jersey and bought a condo in Cresskill, NJ. The unit needed some work. Sharon called a local design and remodeling company, Kuken LLC. Kuken recommended new flooring, new kitchen cabinets, remodel of the master bathroom and painting throughout. That was July, 2017. 

On August 10, Sharon visited the Kuken showroom to review sample cabinets, flooring, and paints. She liked what she saw. Two weeks later, Sharon returned to the showroom and made her selections. A week after that, Sharon and Kuken met again to review the estimate -- $34,380. Sharon gave her OK to proceed and wrote two checks, the first for $9,523 with a memo “cabinets”. The second check was for $9,000 and included a note, “deposit”. She also gave Kuken keys to the condo so work could proceed while she was gone. Completion was to be by the end of October.

All this was perfectly routine -- except for one minor detail. There was no signed contract. What should have been a short, easy project became an expensive odyssey. And it's still not finished. I'll explain.

New Jersey requires a written contract for any home improvement project over $500. The contract has to include specific disclosures. Penalty for failure to comply: Refund of all money collected or treble damages plus legal fees. And it’s always the contractor that pays. The owner has no obligation to sign a valid contract.

Work Starts

Kuken started by removing several cabinet doors as samples. Days later, Sharon sent a message asking for a change:  "If the bathroom remodel is going to take several months then I would rather just replace the vanity in that bathroom . . . and just get kitchen cabinets, floors, and paint done." Keuken agreed to send a new estimate covering just what Sharon wanted.

Four days later, Sharon and Kuken met again at the showroom. Kuken assured Sharon that they would send a new estimate. The job would be finished on time.

As of September 25, there still wasn’t any written contract. But Sharon and Kuken worked together on an application to her home owners’ association. Sharon needed permission to begin work. Kuken supplied the liability certificate required by the HOA. The following day, Sharon advised Kuken that the application had been approved and asked once again for a final estimate. Kuken sent the “final”’ estimate three days later – but still no contract.

In a conference call two days later, Sharon complained that the “final” estimate didn’t mention paint or primer. Kuken offered to correct the estimate and promised that work would be completed by the end of October.

Two days later, Kuken called to say they couldn’t meet the October completion date. Work wouldn’t be done until the end of November. Sharon threatened to cancel the project. Kuken explained that Sharon couldn’t cancel now. The doors were already on order and would arrive by October 6, 2017. Installation was scheduled for October 11. Sharon accepted the new schedule but cancelled the flooring and painting part of the job – reducing her cost by $7,194.70. And she wanted a new estimate.

Kuken sent the new estimate on October 3, 2017 – but still no contract. According to Sharon, this new estimate still wasn’t right. She wanted another estimate for just the cabinet doors.

Kuken responded with two options: The first was to install the cabinet doors and issue a refund for $7,310.83. The second option was to deliver the cabinet doors and hardware and refund $8,810.63. Sharon agreed to the first option if work would be done by October 13, 2017. She refused to sign anything that did "not have [that] level of detail."

On October 5, Kuken sent a new estimate, including a note that delay was possible, depending on the schedule of the manufacturer. Sharon crossed out that language, added her signature and returned the amended estimate. Kuken didn’t like that, insisting on a signed copy of the estimate without any deletions. Sharon never signed the revised estimate.

Here Come the Lawyers

On October 12, Sharon’s attorney sent a letter to Kuken demanding refund of the full $18,523. Now Kuken needed a lawyer. Kuken’s legal counsel recommended limiting contact with Sharon and advised against returning anything to her.

As I’ve said before in this space. When the job goes bad, you better have a good contract. Kuken had no contract at all.

What came next was three years of litigation in New Jersey courts. The trial court awarded Sharon $72,569, including treble damages, attorney's fees and costs. Kuken appealed. The appellate court affirmed that judgment in part, vacated it in part and remanded the case back to the trial court for further proceedings. That’s where the case of Park v Kuken LLP is today, more than four years after work started.

Be aware: Any job without a contract can morph into a slow-motion train wreck. Don’t let your next project run off the rails. Lock in the price and terms before lifting that first tool. Construction Contract Writer does that -- and meets legal standards of all 50 states. The trial version is free.

Traps for Construction Managers

Many experienced construction pros prefer working as construction managers rather than construction contractors. And for good reason. Compared to conventional construction contracting, construction management contracting offers major advantages: far less risk, very little working capital needed, no employees, no inventory, no payables, no warranties or callbacks, no investment, no liens. And it’s perfectly legal.

Better still, some states don’t even require CM contractors to be licensed. More on that later.

What’s different about CM contracting?  A construction manager is a consultant to the owner, pure and simple. The consultant's job is to protect the owner against high costs, delay, shoddy work and risk of loss. No one else on the site shares that agenda. The CM recruits contractors and subs, schedules work, orders materials, and tells the owner when it’s time to pay bills. All contracts are in the name of the owner. So what could go wrong?

Plenty. Here’s a short list.

Trap 1, Bad Contract

CM contracts are very different from construction contracts. There’s no set price for the work. Your contract has to define precisely what’s included in your responsibilities as CM. The only charge is your consulting fee. Usually that’s some percent of construction cost. But it could be a set cost per week or per month. For more on the CM contractor’s scope of work, click here.

CM contracts can include an estimated cost of completion – or set a maximum consulting fee. But that’s not a construction cost. CM contractors don’t guarantee construction costs.

For CM contracts that comply with both federal law and the law in your state, regardless of the type of construction, have a look at Construction Contract Writer. The trial version is free.

Trap 2, Mistakes in Execution

CM contracting is walking a fine line. Slip out of the CM consultant role and into construction contractor mode and you’re in trouble. A case decided earlier this month in Washington DC illustrates the point.

Karen and Charles Evans hired the C.A. Harrison Companies, LLC (CAH) to manage their home improvement project. CAH recommended another company to serve as prime contractor. Karen and Charles ratified that choice. So far, so good. But shortly after work started, the prime contractor quit. CAH didn’t mention any of this to Karen or Charles. Instead, CAH set out to finish the job as prime contractor. Eventually, the Evanses discovered what happened and terminated their agreement with CAH. When CAH sued for breach of contract, the Evanses counterclaimed, arguing that CAH had no enforceable construction contract and wasn’t licensed to do home improvement work. The Superior Court agreed, ordering CAH to refund $314,394.35 to Karen and Charles.

That’s the obvious case. But this theme has subtle variations. For example: Every significant job comes with changes. What does a CM do when the owner wants to change some construction detail? The thing not to do: authorize the change and sign a change order. That’s construction contracting. Instead, draft a change order for signature by both the owner and the contractor.

Another example: Any CM contractor who writes a check to cover job site labor or material costs is courting trouble.

Trap 3, Check Your License

Some states (CA, DC, TN, NY, VA) have decided that CM consultants need a contractor’s license. Other states (MT) have gone the other way, no license is required. Louisiana went half way: CM consultants aren’t construction contractors but have to offer the same warranty that’s required for construction contractors. In other states, the issue is still open. My guess: Construction is a heavily regulated industry. States aren’t going to let clever operators slip under the net by claiming to be consultants rather than contractors. Eventually, most states will task CM consultants with meeting requirements set for conventional prime contractors. For residential work, that will include giving all the notices and making all the disclosures required in residential construction contracts. But this hasn't happened yet. So CM contractors in most states still have plenty of wiggle room.

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.

Use a Written Warranty To Limit Claims

 Most builders avoid any mention of warranty in their contracts. Why ask for trouble? Right?

 If that’s your attitude, keep reading. You may be missing an opportunity.

Like it or not, every builder issues at least an implied (unwritten) warranty on every job. In most states, this is called the implied warranty of workmanlike construction. It covers whatever state law says it covers and whatever a court considers reasonable. Except in rare cases, you can’t disclaim this implied warranty. It goes with the job.

But your contract can include an express (written) warranty that limits or modifies your implied warranty. A case decided in Colorado earlier this month is a good example.

Weyerhaeuser manufactures wood floor beams. Dream Finders Homes and a subsidiary installed those I-beams in their new homes. The beams came with a written warranty against manufacturing defects. For breach of this written warranty, Weyerhaeuser agreed to cover the cost of repairs “not to exceed 3 times the original purchase price.” Weyerhaeuser’s warranty disclaimed any responsibility for other damages.

In December 2016, Weyerhaeuser changed the formula for fireproofing their G2 floor beams. The new G4 floor beams had a coat of urea-formaldehyde. By spring 2017, buyers of homes with these G4 floor beams were complaining of a chemical odor in the basement that irritated their eyes and throat. Weyerhaeuser stopped shipping G4 beams and hired a contractor to remove the coating in 38 homes. The cost of remediation was far beyond three times the original price of the joists.

Dream Finder Homes conceded that Weyerhaeuser met their obligation under the warranty. Still, they sued for negligence and fraudulent concealment. Dream Finder’s suit asked damages for lost profits, extra legal expense, financing costs, builders risk insurance and higher operating costs. The trial court awarded damages against Weyerhaeuser of over $14 million. Weyerhaeuser appealed.

What Would You Decide?

If Weyerhaeuser met their obligations (under the contract), were they still liable for negligence? Every law student will recognize the issue: contract law (promises made) vs. tort law (an obligation to the public entirely apart from any agreement). The “economic loss rule” limits recovery in tort when there’s an underlying contract. Someone injured by a breach of contract has no claim for tort damages absent an independent duty of care under tort law.

Last month, a Colorado appellate court (2021 COA 143) reversed the trial court decision. According to the appellate court, Dream Finder Homes was trying to recover for damages expressly excluded by their written warranty. Contract damages were enough. That warranty saved Weyerhaeuser $14 million.

There’s a lesson here for every builder. A written warranty can save you a bundle. Define in your contract exactly:

• What constitutes a defect, and,
• What you plan to do if the warranty is breached.

Any reasonable attempt to resolve warranty claims is likely to be upheld by a court.

So where do you get good warranty contract language? That’s easy. Construction Contract Writer includes warranty language for nearly every trade and every type of project. The trial version is free.

Wage Theft in New York

New York construction contractors get a new headache on January 4, 2022. New code sections make prime contractors liable if subs don’t pay their employees or independent contractors.

Hold your breath and think about that for a second. Suppose you’ve paid your subs on a project and have a full book of lien releases. Then, surprise! A sub’s employees, tradespeople you’ve never met, sue your company for back wages on the job. That’s an entirely new risk category.

Effective January 4, New York General Business Law § 198-E makes contractors liable for wages owed and not paid by subcontractors at any level. The “Wage Theft” law is very broad – covers both commercial and public works jobs. “Wages” includes both pay and benefits. Only home improvement and residential construction of ten units or less are excluded.

Any employee owed wages by a sub can file suit against the prime contractor and collect both back wages and the cost of bringing suit. And consider this: the right to sue for back wages doesn’t expire for three years. That’s long after the project has been closed out.

Contractors don’t set pay dates or pay policies for subcontractors. They don’t get advance notice when a sub’s running short of cash. Yet, somehow, the new law makes prime contractors responsible if a sub’s employees don’t get paid. How does this make sense?

Here’s how. Effective January 4, 2022, New York contractors have a new responsibility – checking to be sure everyone on the job is getting paid. That’s New York General Business Law § 756-f.

Section 756-f gives contractors the right to demand certified employee payroll records from their subs – covering both employees and those working as independent contractors. Failure to provide these records is a defense to any claim of non-payment.

Problems With the New Law

• Starting in 2022, NY subs and lower-tiered subcontractors can be required to prepare certified reports for every pay period. That takes time and runs up overhead.
• Many subcontractor employees work several jobs during a pay period. A prime contractor isn’t entitled to pay reports on unrelated jobs. Subs without robust accounting systems have to figure out some way to break down pay records by job.
• Consider the moral hazard. Many subs are undercapitalized, little more than labor brokers. A sub about to go belly-up can strip assets out of the business and disappear, knowing full well the prime contractor has to cover debt to employees.
• Nothing in the law gives prime contractors the right to recover legal fees run up defending against claims by subcontractor employees.
• Nothing in § 756-f requires subs to reveal who did NOT get paid on time. That's what prime contractors really need to know. 
• Jobs covered by the new sections 198-E and 756-f aren’t a perfect match. For example, some jobs may have § 756-f rights but no § 198-E obligations.

What You Can Do

• The obvious answer is to use only reliable, well-managed subs able to provide certified pay records for your jobs. That may rule out the lowest bidder.
• Liability for wage claims can’t be waived by subcontract. But it’s easy to add subcontract language that requires indemnity by the subcontractor, both for wage claims and the legal cost of defense. Require subs to pass that same indemnity down to lower tier subs.
• Know more about your subs – especially subs with a short company history. Include in your subcontracts the right to audit books and records. Then get monthly financial reports.

All the terms you need in NY subcontracts are in Construction Contract Writer. The trial version is free.

Awarding Damages in Florida

Mike Judet's South Florida home was severely damaged by lightning in 2016. He accepted an offer from Cano, Inc. of West Palm Beach to make the repairs. The contract price was $300,000, payable in $30,000 installments. Cano started work. Judet made the first three payments, $90,000. Then Judet discovered a problem.

Cano hadn’t bothered to take out a permit on either the plumbing or electrical work. Cano and Judet couldn’t agree on what had to happen next. So Judet stopped paying and terminated the agreement. Cano slapped a $40,000 lien on the project and sued for breach of contract. Judet’s counterclaim alleged breach of contract, asked for discharge of the lien and restitution of the amount paid in excess of the value of work completed.

Now What?

Writing a good contract should be easy. (More on that later.) Mopping up after a busted contract can be a hot mess. In the case of Judet and Cano, two sets of attorneys and Florida courts needed five years to tie up the loose ends.

The trial court found that Cano committed the first material breach of contract by failing to obtain the required permits. That made Cano liable for contract damages. But what were the damages?

When a contractor breaches a contract, the owner should recover any additional cost of getting another contractor to finish the job. That’s black letter contract law: When there’s a breach of contract, courts try to restore the injured party to where he would have been if the contract had been performed. That’s called “benefit of the bargain” damages.

In this case, black letter law produced an absurd result. Follow me through on the math.

The contract price was $300,000. Judet’s expert testified at trial that the cost to complete Cano’s work was only $160,000. So, a reasonable cost for the job was the $90,000 Judet had already paid plus the additional $160,000. That’s only $250,000, $50,000 less than what Judet had agreed to pay. By Cano’s reasoning, the breach of contract saved Judet $50,000. Cano’s counsel insisted the court should not award Judet any damages!

Counsel for Judet didn’t agree. At trial, Judet’s expert witness testified that work Cano performed was worth $49,150. By Judet’s reasoning, Cano owed Judet a refund of $40,850, the difference between the value of Cano’s work and the $90,000 already paid.

You Decide

Who was right? If the contract breach by Cano saved Judet $50,000, did Cano have any right to a partial refund on the $90,000 already paid?

The trial court judged Judet’s expert witness to be credible, both on the value of work completed ($49,150) and the cost to complete the job ($160,000). That made sense. Judet’s expert witness was the contractor who agreed to complete the job for $160,000. Based on that reasoning, the trial court awarded Judet $40,850. Cano appealed.

The appellate court affirmed the trial court decision. Here’s why. If there’s a total breach of contract, as in this case, the court has two options on damages. The first is to award benefit of the bargain damages. That would have yielded Judet nothing. The other choice was to treat the contract as void from the beginning – put the injured party back where he was before signing the agreement. On that basis, Judet was entitled to a $40,850 refund.

I agree with the appellate court decision (Cano, Inc. v. Judet, 9/22/2021). But I can’t resist a few observations:

• Five years in court! The legal bills were probably more than the cost of construction.
• This type of dispute could be settled in arbitration in months, not years.
• A few extra minutes spent drafting this contract would have saved five years of litigation.

It’s easy to protect yourself from disputes like this. For example, any of the following written into the contract could have kept both Judet and Cano out of court:

• Mandatory arbitration.
• Specific language on what happens if the contract is terminated.
• If either party to the contract sues, the losing party pays legal fees of both sides.

To avoid problems like Cano v. Judet, have a look at Construction Contract Writer. The trial version is free.

 

Home Improvement Surprises in Maryland

Eugene Uzoukwu owned an older home in Baltimore City, Maryland and needed some work done -- a “total renovation”, in Eugene’s words. Kevin Servance agreed to start the job. Kevin wrote up the contract. He would furnish all materials, labor, and permits necessary for a new rubber roof and also remove an existing fire escape. The contract price was $14,000. At the top of the contract, Kevin listed a Maryland Home Improvement Commission license number.

That was a good start. Maryland contractors have to toe the line when writing home improvement contracts. Maryland's Business Regulation Code sets a high bar:

• Section 8-501 lists several pages of notices and disclosures that have to be in home improvement contracts.
• Section 8-617 limits advance payments to one-third of the home improvement contract price.
• Section 8-605 prohibits deviation from the terms of a home improvement contract.
• Sections 8-607 and 8-608 prohibit false promises, misrepresentations and fraud.
• Section 8-620 authorizes the Maryland Home Improvement Commission to collect a civil penalty of $5,000 for violation of Maryland Home Improvement Law.
• Section 8-623 makes violation a misdemeanor punishable by a fine of $1,000 and 6 months in jail.
• Code of Maryland Regulations section 09.08.01.26 requires three more disclosures in home improvement contracts.

Next Came the Surprises

Work proceeded normally until it came time to remove a fire escape from the rear wall of the building. Kevin or his crew tied a line between the fire escape and his truck – without bothering to detach the fire escape from the rear wall. When the truck pulled away, part of the rear wall came down with the fire escape. That was Surprise One.

Eugene estimated the damage to the rear wall at $17,051.61 and filed a complaint against Kevin with the Maryland Home Improvement Commission. Then came Surprise Two. Kevin didn’t have a Maryland contractor’s license. He had listed someone else's license number on the contract.

Kevin pleaded guilty in Baltimore City Circuit Court to acting as a home improvement contractor without a license and got a 6-month sentence. But the circuit court denied Eugene’s claim for restitution on the ground that removing the fire escape was demolition, not home improvement. Eugene appealed. The appellate court had to interpret Maryland’s Business Regulation Code Section 8-601 which defines home improvement.

No Surprise Here

Nearly all states set standards for residential construction contracts. Many states, including Maryland, set higher standards for home improvement contracts. In most states, the definition of home improvement is broad enough to include nearly any type of construction. Only routine maintenance, warranty repairs and new home building are excluded.

In the case of Uzoukwu v. State of Maryland (decided 9/2/2021), the appellate court gave Eugene a second chance to prove his claim. Reversing the circuit court decision, Judge Nazarian suggested the term home improvement “covers all alterations to a home undergoing renovation, including removing unsightly or dangerous parts of a residence”.

If you’re a construction contractor working on an existing residence with four units or less, avoid surprises. You need a contract that meets state standards for home improvement work. Drafting a perfectly valid, fully enforceable contract is easy. Get Construction Contract Writer. The trial version is free.

 

Selecting A Pig in a Poke

Pandemic times have created a new problem for many contractors. The subs they know and trust aren’t taking on more work. That can be both bad and good. I’ll explain.

Many residential contractors negotiate their sub-trade work. They do just fine using the same subs on job after job -- seldom putting work out to bid and usually starting without a formal contract. They’re comfortable using a small number of specialists, trust them to do nothing but first-class work and are perfectly content with the prices they charge. This is construction contracting based on trust and mutual respect – as it should be. Unfortunately, COVID-19 has trashed many of these close relationships.

When your favorite subs won’t bid, the only option is to expand the pool of prospects. The down-side is that trying a new sub is like selecting a pig in a poke. So many questions:

• Can they do the work?
• Are their prices fair?
• Will they work well with our other tradesmen?
• Will their schedule fit my schedule?
• Are they good at call-backs?

Almost essential when trying any new sub: A written contract. More on that later.

Now the up-side

Open bidding nearly always attracts more prospects. The more bidders, the lower the contract price. The lower the contract price, the greater the risk of sub-standard results. Your task is finding the best balance between cost and risk.

On public works projects, state and federal law usually require that bid competitions be open to everyone qualified. There’s no such requirement on private jobs. You can award the job on any grounds you select. There’s a spectrum of choices:

• Negotiate with a single sub at your “usual” price.
• Ask for bids from a selected list of subs.
• Open bidding to any sub qualified to do the work.

If you decide to open competitive bidding, it’s good practice to screen prospects early in the process. Don’t solicit a bid from a sub obviously unqualified to take on the work – regardless of the price. Select subs the same way you select any professional –- by reputation and recommendations from satisfied clients.

The fact that you’re asking for bids on a project doesn’t necessarily mean you’ve ruled out awarding the contract on a time and materials (cost plus) basis. Even T&M contracts can be awarded to the lowest responsible bidder. If your choice is T&M, ask for bids based on the sub’s hourly labor rates, markup and, perhaps, a guaranteed maximum price.

Any time you’re dealing with new subs, get a written agreement. Nothing heads off misunderstandings better than a good subcontract -- especially important in new business relationships. Every sub has a unique set of norms and expectations. Be sure that what the new sub expects is aligned with your way of doing business. The best source I know for subcontracts is Construction Contract Writer. The trial version is free.

No matter how you select a subcontractor, there’s an easy way to check the new sub’s charges. National Estimator Cloud has thousands of labor and material cost estimates for nearly all construction trades – well-organized, well-indexed, up to date and available on the Cloud anywhere you need a price. The cost is only a few dollars a month and you can quit at any time.