What's this Going to Cost?

 How do you answer when an owner asks about cost?

Quote a price that’s higher than expected and the job may not happen. Quote a price that’s too low and your casual comment could end up being quoted in a legal brief. Refuse to quote any price and you’ll be considered devious or uncooperative.

So, what should you say when an owner asks about cost?

My advice: Welcome the question. It’s an invitation to start asking questions yourself. For example:

• “That depends a lot on what you decide. It’s a little too early to nail down a price. But I’m sure we can live within your budget. What figure do you have in mind?”
• “I’ve seen jobs like this go for between $X and $Y. Of course, the cost could be less or more, depending on choices you make later. A lot depends on finish materials and when you want to get started. When I know more about the job, I’ll give you a written estimate.”
• “I don’t want to quote a number off the top of my head. But I have some good references back at the office. I’ll work up numbers based on those figures and get back to you tomorrow with typical square foot costs.”

The cost question comes with an obvious advantage. It’s an open invitation to come back later with an answer. But don’t leave without qualifying your prospect. Too many on-site meetings are a waste of time. I call it a prayer meeting when:

• The owner is undercapitalized or isn’t a good prospect for potential 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 aren’t realistic.
• The owner has been turned down by several builders or lenders.
• Your prospect may not have authority to contract for the project as conceived.

To be sure you’re not in a prayer meeting, ask some questions yourself:

• “Have you talked to anyone about financing?” Obviously, financing 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 problems, potential issues with neighbors, design review committees, setback requirements or anything else that could halt the project.

If you plan to come back later with a proposal (and contract), be sure to collect job details:

• Name and address of each property owner
• Construction site – either street address or legal description (for lien purposes)
• Phone numbers –day phone and cell
• Email address
• A good concept of what the job requires – including rough dimensions and square footage Potential access issues, the availability of water, electric, sanitary facilities, etc.
• Who will pull the permit?
• Utility companies that will be involved.

When you come back with a price, bring a contract ready for signature. Construction Contract Writer drafts letter-perfect agreements for any residential or commercial project in any state. The trial version is free.

 

Court Cripples Ohio’s Home Construction Act

Ohio’s Home Construction Service Suppliers Act ("HCSSA") has been law since 2012. Apparently the law has never been interpreted or enforced by an appellate court -- until last month. That’s when Ohio’s Eleventh District Court of Appeals decided the case of Beder v. Cerha Kitchen & Bath Design Studio, LLC.

By way of background: Ohio’s HCSSA is a consumer protection statute. Specific acts are defined as deceptive. Changes to the contract price have to meet reasonable standards. Owners are entitled to notices and disclosures. Anyone injured by deceptive acts has a statutory remedy. Last month, the Act finally got its first test in court.

It didn’t go well.

Ilia Beder and Raimonda Beder filed suit under HCSSA after their home remodeling project fell into acrimony. The Beders claimed their contractor, Cerha, unreasonably delayed the work, performed defective work, was abusive and was not registered with the city of Mentor. At trial, both the Beders and Cerha claimed breach of contract.

Major irony: The trial court ruled that Ohio’s HCSSA applied to the Beder job. So far, so good. And then the court awarded the contractor damages for breach of contract. The Beders got nothing. Scratch Ohio’s stab at protecting home owners. But keep reading. It gets worse.

Remodeling Isn’t Construction

The Beder’s job was remodeling. No doubt about that. According to Appellate Court Presiding Judge Eklund, HCSSA applies only to new construction, not remodeling. His decision hinged on the meaning of “construction”. Judge Eklund relied on a definition of “construction” adopted nearly 30 years ago by the Ohio Supreme Court. "Construction" is the creation of something new, as distinguished from the repair or improvement of something already existing.

That’s going to be news to thousands of Ohio home improvement specialists – men and women who considered themselves construction contractors. Not so, according to Judge Eklund. They’re not in the construction industry.

I prefer the dissenting opinion by Judge Westcott Rice. True, HCSSA does not define “construction”. But any modern understanding of “construction” in the residential context has to include home improvement. Moreover, part of the law is nonsense if remodeling isn’t considered construction. Section 4722.01(B) of the act makes HCSSA applicable to work on a single apartment even if the structure has many apartments. Work on that single unit is almost certainly remodeling. Under HCSSA, it's also construction.

Today, most new residential construction is managed by merchant builders or spec builders. Custom-built homes are the exception in most communities. Judge Eklund’s ruling would apply HCSSA exclusively to custom-built homes, a small and dwindling segment of the housing market.

Even more persuasive: Most states have adopted consumer protection statutes to help owners planning home improvements. In Ohio, that was HCSSA. The Beder decision leaves Ohio in the minority of states without a home improvement statute.

I don’t expect this situation to last for long. Someone in the Ohio legislature is reading the Beder decision right now and shaking their head in disbelief. Expect the Ohio legislature to clean up language in HCSSA at their next opportunity.

Rocket Lawyer Contract in Maryland

Laura and Daniel Holland wanted a custom home built on their Pocomoke City, Maryland dairy farm. They selected an architect to draw plans for a 3,912 SF residence. After several rounds of negotiations and changes, Don Littleton of Wicked Professional Services Inc. (WPS) agreed to build the house for $700,250.  Don emailed Ms. Holland a construction contract created from a template on RocketLawyer.com. The Hollands signed the agreement. Work was to be completed by May 16, 2018. 

If you know anything about Maryland construction contracts, you can see trouble coming.

To comply with Maryland’s Custom Home Protection Act (MCHPA), the agreement needs a long list of notices and disclosures:

• A draw schedule signed by the buyer and builder;
• A list of the primary subs;
• A notice that all changes have to be documented with change orders;
• A statement in bold type disclosing whether the builder is covered by Maryland’s home warranty program;
• A notice that the builder has to disclose the names of subs and suppliers after receiving each progress payment;
• A notice that the builder is required to provide waivers of lien from all applicable subs and suppliers after final payment to each sub and supplier;
• A notice about buyer's risk under Maryland’s mechanics' lien laws.

Omitting any of these notices in a Maryland custom home contract is an “unfair or deceptive trade practice" and makes the builder liable for losses due to the violation – including attorney fees. In the words of the trial court, the WPS contract based on a Rocket Lawyer template was "legally deficient and woefully inadequate."

The court evaluated the agreement as a "standard general contractor contract" as "accepted in the industry with a management fee tacked onto the end." The agreement was "not sufficient to establish the contract in the nature of a construction management or a cost-plus contract as is generally recognized." The management fee was "inconsistent with a general contractor arrangement generally and with the subject contract specifically" and was poorly defined. The contract did not specify when the fee was earned or how it would be paid. The court ruled Don’s addition covering the management fee to be vague and unenforceable.

Now What?

If the job had gone as planned, WPS might have earned their $58,125 fee. But the job had problems.  More than a year after scheduled completion, work still wasn’t done. Worse, the job was nearly $400,000 over budget. Project cost had ballooned from $700,250 to $1,075,102.

As pointed out many times in this space, when the job goes bad, you better have a good contract. WPS didn’t. The Maryland trial court denied WPS’ claim for $352,647 in damages. WPS would not be reimbursed for $218,347 they had paid to subs and suppliers on the Holland job.

Instead, the trial court awarded the Hollands $58,066 in damages, principally the cost to complete work. Last month an appellate court affirmed the award of the trial court but remanded the case to the trial court for a ruling on attorney fees. For any violation of the MCHPA, the Hollands can collect reasonable attorney fees.

Notice This

In the words of the trial judge, “this was an unusual construction contract dispute because there were no complaints about the quality of the workmanship.” The problem was the contract – a bungled attempt to blend elements of cost-plus and fixed price agreements.

Don’t make the same mistake. Start every job with a contract as professional as the work you plan. Construction Contract Writer drafts letter-perfect contracts for any job and any site – whether fixed price or cost-plus. The trial version is free.

 

A Warning for New York Contractors

Write a bad contract for New York home improvement work and you may end up with less than nothing. The case of Goodspeed v. Aiello proves the point.

A leaky radiator damaged Maria Goodspeed’s New York home earlier this year. Wallboard and flooring had to be removed and replaced. Michael Aiello of A & B flooring agreed to do the work. Michael wrote up the contract on a small sheet of notebook paper:

I Michael Aiello agree to do all repairs caused by the radiator leaking. Work includes sheet rock, paint, flooring, demo & removal. A deposit of $6,200 will be recieved [sic] on 1-27-22. the balance of 2.800 is due upon completion. Any additional cost must be disgussed [sic] and agreed to by both parties.

The page was signed by both Maria and Michael. Maria paid A & B the $6,200 on February 15, 2022.

Two weeks later, work had not started. But Maria’s insurance carrier, Allstate, was now involved. Maria gave Allstate’s adjuster a statement:

On 3/1/22 an invoice was turned into Allstate as an additional expense to original job that was being done for Maria Goodspeed. Invoice was agreed to and approved by myself, homeowner and insurance company. The additional invoice was for a total of $8,050.00 The total amount owed to A & B Flooring to date is $11,000.

A & B scheduled work for the middle of March. By April 1, 2022, demolition was well under way. But Mike wanted another advance to continue work. Maria asked to see receipts for materials purchased for her job. When Mike wouldn’t provide those receipts, Maria gave up on A & B Flooring. She filed suit on April 7 to recover her $6,200 advance.

You decide.

1. What portion of the deposit was A & B Flooring entitled to keep for work on the Goodspeed job? They had done plenty. In Maria’s words, they ” gutted our house . . . "
2. Did either of the two written documents that describe the Goodspeed job qualify as a New York home improvement contract?

Judge Bannister at Little Falls (NY) City Court had no trouble with either question.

Payment for Partial Completion?

“The court will not allow the Defendant to draw the Claimant and the court into a controversy concerning the amount and value of the benefits received when the value of those services left her with a demolished home interior and a contractor asking for things outside the scope of their contract. The Claimant gave the Defendant $6,200 as an initial payment. This Court finds that she is entitled to a return of the initial payment.”

A Valid New York Contract?

The General Business Law section 771 requires notices and disclosures in home improvement contracts. The contract offered by A & B included none of these:

• Estimated dates when the work will begin and end, any contingencies that could change those dates, and whether a completion date is the essence of the contract.
• Description of the work to be performed, the materials to be provided to the owner . . . and the agreed upon consideration for the work and materials.
• Notice that subcontractors and suppliers have the right to claim a lien on the property.
• Notice that the contractor is required to either deposit all advances in an escrow account or post a bond.
• Schedule of progress payments showing the amount due at each stage of completion.
• Notice of the three-day right to cancel.
• Disclosure of the contractor’s property and casualty insurance coverage.

New York law imposes a civil penalty of up to $2,500 for writing a bad home improvement contract. Since this was a first offense, Judge Bannister didn’t impose the civil penalty, but with a warning. “However, if there are future sustained violations in the future, this Defendant is on notice that a civil penalty will be considered.”

It’s easy to draft letter-perfect construction contracts for any state and for any type of job. Get Construction Contract Writer. The trial version is free.

 

Bad Contract, Good Result

Frank Salame owns a home in Pomona, California. Eleven months out of the year, Frank works in Lebanon as an engineer on building projects. When no one is home in Pomona, Frank has a friend, Antoinette Auon, look after his house.

While Frank was in Lebanon, neighbors noticed a liquid leaking from under the garage door. Turns out, a water filter under the kitchen sink had sprung a leak. By the time Frank got word of what had happened, water had seeped into kitchen cabinets, flooring, down walls and into the ceiling of the garage below. Mold was blooming everywhere.

Because he was in Lebanon, Frank asked his friend, Antoinette, to "take care of" the problem. She did, signing contracts with Star Restoration to put Frank’s home back in livable condition.

Star Restoration got to work. A plumber removed the leaking water filter. A mold expert assessed what had to go. When contaminated materials had been removed, restoration started: framing, sheetrock, plaster, painting, tile floor in the kitchen, kitchen cabinets, new countertop and sink.

Meanwhile, Frank filed a claim with his insurance carrier, giving Antoinette "full power of attorney to handle" his claim. Frank collected $28,000 from the insurance company. But when Star Restoration sent their invoice for $42,360, Frank refused to pay. Instead, he offered to settle for $28,000. Star refused the offer and filed suit.

You decide. Did Frank owe the full $42,360?

At trial, Star Restoration had some problems.

Frank Never Signed the Contract

But the court decided Antoinette was acting as Frank’s agent when she signed. Remember that Frank had given Antoinette “full power of attorney” to handle his claim with the insurance carrier. Plus, at one point, Frank gave Star instructions to "finish the job". The court concluded Antoinette had signed with Frank’s consent.

The Star Restoration Contract Was Lame

To be valid, California home improvement contracts need 18 distinct notices and disclosures: start date, end date, the contract price in dollars and cents, a description of the work and so on. Star Restoration’s contract had none of that. Contracts that don’t comply with state law are presumed void. That’s true anywhere you do business.

If the contract was void, Frank owed Star Renovation nothing.

The court had a different view. Where the contract is not otherwise illegal, courts can enforce a bad contract if:

(1) the owner is not in the class the statute was enacted to protect, and

(2) the owner would be unjustly enriched if the contract were voided.

Here, both (1) and (2) apply. Frank is an engineer with years of construction experience, not an unsophisticated consumer likely to be swindled. Second, Frank would be unjustly enriched if he kept the $28,000 and got his home renovated at zero cost.

But Star Restoration’s contract wasn’t a complete bust. The agreement gave Star 1.5% per month interest on any unpaid balance plus attorney fees if suit was necessary to collect.

The trial court entered judgment for Star totaling $212,504.09: $35,360.62 in damages, $36,375.91 in prejudgment interest, $5,926.49 in costs and $132,290 in attorney fees. Last month, an appellate court affirmed the trial court judgment.

Star Restoration also got a warning from the state license board: From now on, use only contracts that comply with state law. The best way to do that is with Construction Contract Writer. The trial version is free.

Robbing Peter to Pay Paul

Every contractor knows the temptation: use cash from job A to cover expenses on job B. That’s called diversion of funds. It’s perfectly legal in some states and a crime in others. But it’s not good business in any state. The Massachusetts case of Damian Anketell illustrates my point.

Damian Anketell was a licensed Massachusetts home improvement contractor, doing business as Ground Up Construction. Not long ago, he signed a contract to remodel the attic of a Massachusetts home – adding an office, bedroom, bathroom and play area, replacing the roof and building a staircase. The contract price was $111,293. Payments were (1) $38,952 as a deposit; (2) $27,823 on the first day of demolition; (3) $27,823 on completion of rough construction and framing; and (4) $16,695 when done. Nothing in the contract required Damian to use payments on the attic job exclusively for that project.

Damian had a second company, Castle Hill Properties. Castle Hill bought, renovated, and sold properties. When Castle Hill needed cash, Damian dipped into the Ground Up account. You can guess what happened next.

Before the third installment on the attic job was due, Damian came up short of cash. He asked for and got another advance on the attic job, $11,130. At that point, Damien had been paid $77,814 for the attic job, nearly 70% of the contract price. But Ground Up had completed less than twenty-five percent of the project. Framing wasn’t complete. The roof was off. Exposed areas were covered only by a tarp. The HVAC system had been disconnected. But it got worse.

About that time, one of Damien’s subs asked for a meeting with the owners. The sub said he and other subcontractors on the job were not being paid. He had seen Damien’s bank statements. Advances for the attic job had been diverted to Damien personally: cash withdrawals with no explanation, checks payable to "cash" or to Damien personally. There was no record of where most advances on the attic job had gone. And Ground Up's checking account had a negative balance.

When the owners refused to advance more cash, Damien walked off the job. Now what?

The homeowners filed suit against Damien, Ground Up, and Castle Hill. Two days later, Damien and Ground Up filed for bankruptcy. The bankruptcy court ruled debts on the attic job non-dischargeable due to fraud and misrepresentation. The homeowners were due a refund. But that wasn’t all.

The homeowners also filed a complaint with the Massachusetts Office of Consumer Affairs and Business Regulation. The OCABR hearing officer found that

1. Damien went through close to $50,000 from his advances on the attic job before construction started.
2. Some of that $50,000 was diverted to Castle Hill.
3. Failure to disclose that advances on the attic job would go into a general business fund was a material misrepresentation under Massachusetts law.

Diversion in Other States

Fifteen states impose restrictions on use of construction funds. Most of these states make the contractor a trustee of funds that will become due tradespeople, suppliers and subs. The contractor is liable for diversion of construction funds the same as any trustee would be liable for misuse of funds. California goes one step further. Penal Code Section 484(b) imposes a fine of up to $10,000 and jail time of up to a year for misapplication of construction funds.

Massachusetts isn’t one of the 15 states that make contractors trustees. But last week the Massachusetts Appellate Court in Damien Anketell v. Office of Consumer Affairs found another way to discourage diversion of construction funds. Massachusetts General Laws 142A, § 17(2) requires a list of disclosures in home improvement contracts. Damien never mentioned that advances on the attic job would be deposited in an account used to bankroll Castle Hill jobs. The court considered that omission a material misrepresentation under Massachusetts law. Damien got hit with a $4,700 administrative penalty and had his contractor registration suspended for ten months.

What should your contracts say about diversion of construction funds? No need to guess. Construction Contract Writer drafts letter-perfect contracts for any job and for any state. The trial version is free.

Collect Interest on Past Due Accounts

What does your standard contract say about interest on late payments? If little or nothing, you may be making an expensive mistake. Here’s an example.

In fall of 2016, a hailstorm damaged Alex Bixby’s Iowa home. JL Construction Services gave Bixby a written bid for repairs, $8,050 for the roofing and $1,735 for new window wraps. Bixby authorized JL to start work. There was no written contract.

By August 2017, JL had completed their work on the roof. JL gave Bixby a bill for that portion of the job, $8,050. Bixby didn’t pay. His understanding was that payment was due when both roof repair and window wrap was complete. The window part of the job hadn’t started yet.

By December 2017, Bixby had a complaint. His roof was leaking, probably due to a torn rubber boot JL had installed around a vent pipe.

By January 2018, JL still had not been paid. JL offered to complete the job – the window wraps. Bixby explained that another company was finishing the job. Plus, Bixby claimed a credit for damage from the leaking rubber boot. And that’s where the job stood for nearly a year.

On November 28, 2018, JL’s attorney sent a demand for $8,933.83, including interest at 1.5% a month (18% per annum) from the date of completion. Bixby still refused to pay.

On July 1, 2020, JL sued Bixby, claiming $8,050 for the roofing work plus $3,800 in interest.

Nothing in the oral contract required payment of interest on any amount due. Nothing in JL’s statements complied with Iowa law on interest. That left the court no grounds to award interest as part of JL's damages.

Earlier this month, the Court of Appeals of Iowa affirmed the trial court decision. Too bad. JL waited nearly three years to get paid and lost their claim for $3,800 in interest.

How to Collect Interest

First, understand that your contracts should set an interest rate for late payments. That lays the foundation for an award of interest if you have to sue. This late payment fee is not a finance charge. You expect to be paid in full when each phase of the work is complete. Interest is due only if payment is delayed.

Second, understand another advantage of setting an interest rate in the contract. It’s just common sense. If you’re not paid on time, remind the owner that interest is accruing at the agreed rate. Worst case, you’ll waive the interest charge in exchange for prompt payment.

Third, understand that the law on interest rates is different in every state. Many states have prompt payment statutes for construction. Some of these laws apply only to subcontracts or only to public works construction or only to commercial (non-residential) projects. Others apply on all projects, including residential work. Some prompt payment statutes set a maximum (or minimum) interest charge for late payments. Others allow higher or lower rates if specified in the contract. Usury laws in some states set a maximum interest rate for delinquent accounts.

So what should you do? The answer is simple. Let Construction Contract Writer be your guide – no matter the state and no matter the type of project. With Construction Contract Writer, you see the interest rate options that apply on your job. That makes setting the interest rate an easy choice – and could save or make your thousands. The trial version is free.