Getting Technical in Connecticut

In spring of 2007 William and Kristen Bachman decided to remodel their home in North Haven, CT. East Coast Custom Builders got the job for $77,244.50, including a $25,748 deposit. But when East Coast came by the Bachmans’ home to get a signature on the contract, there was a problem. Kristen didn’t have the $25 thousand ready. That was June. Six weeks later, the Bachmans had the money, signed the June contract, wrote a check and East Coast started work. So far, so good. At least so it seemed.

Unfortunately, the job didn’t go as planned. There was a dispute. Bill Bachman insisted the framing required hurricane ties and accused East Coast of damaging the septic system with a tractor. Tempers flared. Bachman ordered East Coast’s crew off the site and stopped payment on checks totaling $29,000. That put the job on the desk of two attorneys. East Coast’s opening salvo was a suit for breach of contract and foreclosure on their mechanics’ lien.

I’ve said it before. But it bears repeating. When a job goes bad, you better have a good contract.

The Bachman’s attorney reviewed East Coast’s contract and found two problems.

First, both Connecticut law and Federal law give a home owner three days to cancel a home improvement contract. The contract has to identify when those three days begin and end. The June contract had June dates for both beginning work and expiration of the three day right to cancel. The Bachmans didn’t sign the contract until July. So dates in the contract signed by the Bachmans didn’t work.

The court agreed: East Coast Custom Builders, LLC v. Bachman, 2011 Conn. Super. LEXIS 765. March 2011. Failure to identify the beginning date and end date for the three-day right to cancel made the contract unenforceable. East Coast lost on the claim for breach of contract.

But could East Coast collect on their mechanics’ lien? Every state gives contractors a claim for labor and materials used to improve property. Sorry, said the court. Connecticut’s Home Improvement Act voids lien rights when a contract is defective.

Bad news for East Coast. But it got worse. That was the second problem.

The contract gave attorney fees to East Coast if suit was necessary to collect. That must have been reassuring to East Coast. But Connecticut law makes the right to collect attorney fees reciprocal when a company sues a consumer. That means East Coast would have to pay the Backmans’ attorney fees if the Bachmans won in court. And that was Judge Markle’s ruling. East Coast was liable to the Bachmans for $13, 875 in attorney fees.

It’s easy to criticize the court’s decision. The Bachmans had 6 weeks to cancel the deal and didn’t. East Coast lost on a technicality. That should be a lesson for every contractor. Pay attention to what’s in your agreements. Courts take contracts very seriously. You should too.

If you’re serious about using good contracts, have a look at Construction Contract Writer. The trial version is free.

Protect Yourself from Surprises

In construction industry, the unexpected tends to be expensive bad news. And with every surprise comes an obvious question, “Who’s going to pay?”

Owner: “Look, it’s not my fault. You should have known about this. I’m not going to cover for your mistakes.”

Contractor: “This is extra work – not part of the deal. I’ll do what’s required. But I have to charge extra.”

Every surprise has the potential to become an acrimonious dispute.

A Catalog of Surprises
The list of possible surprises on a construction project must be nearly infinite. But most of the surprises likely to cause a dispute fit in one of three categories:
• Mistake or omission in the plans – something the designer, architect or engineer didn’t consider.
• Differing site conditions – hidden or highly unusual conditions no one would have anticipated.
• Change in scope of the work – something discovered later, such as by the inspector.

Get Paid for Surprises
A good contract will resolve most disputes about what’s included and excluded. Point to a contract clause that covers the point in dispute and you’ve won. But I’ve never seen a construction contract that covers every possible surprise. You won’t either.

Federal public works contracts include a changed site conditions clause, giving the contractor a claim when there’s a surprise. That way, contractors don’t have to bid the worst case. They can bid what’s expected. Little or no contingency allowance is needed. That encourages more competitive bids.

But there’s clearly a better way to protect yourself. Limit the job to what’s in your bid or proposal. It’s not permitted on most public works contracts. But it’s perfectly legal in private contracts. Anything omitted from the bid is not part of the job, no matter what other contract documents say.

On a public works job, the awarding authority won’t even look at a contractor’s estimate. Submit a detailed estimate with your bid and the contracting officer will trash it – or consider your bid non-conforming. On a private job, nothing prohibits including a detailed estimate with your bid and having that estimate define the scope of work. Anything not in the estimate is not part of the job, period. The more detailed your estimate, the better you’re protected against surprises.

With a single stroke, you’ve eliminated nearly all risk due to surprises – whether a mistake in the plans, differing site conditions or a change in the scope of work.

When you have a choice, make your estimate define the job. It’s both legal and good contracting practice. None of the boilerplate contracts sold by national trade organizations include this important protection.

To see how your estimate can define the job, have a look at Construction Contract Writer. The trial download is free.

California Home Improvement Contracts

We can agree that consumer protection laws serve a useful purpose. But laws too complex invite evasion. California’s home improvement contracting law is a poster child for that proposition. Most contractors don’t comply simply because they can’t figure out what the law requires. California’s CSLB assesses fines (“civil penalties”) against contractors who don’t comply – but does very little to make compliance easy.

Making It Easy
I’ve listed below everything California requires in a home improvement contract. Any residential job (including painting, landscaping and yard improvements) for more than $500 that’s done for an owner or a tenant occupying a residence needs these notices and disclosures. If you’re interested, required notices and disclosures make up 18 pages of this 21-page contract.

The entire contract has to be in writing, legible and in at least 10 point type.
Page 1 -- The title "Home Improvement Contract" in boldface type.
Page 1 -- The statement: "Any Notice of Cancellation can be sent to this address."
Page 1 -- The name and the address of the contractor.
Page 1 -- Name and registration number of any salesperson.
Page 1 -- The date the contract was signed by the owner.
Page 1 -- In 12-point bold type: "You are entitled to a completely filled in copy. . .”
Page 2 -- The contract price in dollars and cents.
Page 2 -- An approximate date when work will begin.
Page 2 -- What constitutes substantial commencement of the work.
Page 2 -- An approximate date of completion.
Page 2 -- The heading “List of Documents Incorporated into this Contract.”
Page 3 – The down payment can’t exceed $1,000 or 10%, whichever is less.
Pages 3 and 4 -- A payment schedule showing the amount due by job phase.
Pages 4 and 5 – California’s Mechanics’ Lien Warning.
Page 5 -- A statement on release of lien in exchange for payment.
Page 6 -- Confirmation that the contractor carries (or doesn’t carry) liability insurance.
Page 6 -- The name and phone number of the insurance carrier.
Page 6 -- Information about the Contractor's State License Board.
Page 8 -- The statement on performance and payment bonds.
Page 8 -- Notice of California’s 3-day right to cancel.
Page 9 -- A checklist for homeowners.
Page 10 -- Information about commercial general liability insurance.
Page 11 -- A change order form incorporated into the agreement.
Page 11 -- Notes about extra work and change orders.
Page 11 -- A statement on requirements for a change order.
Page 12 -- Receipt acknowledging delivery of the California’s 3-day right to cancel.
Pages 13 and 14 -- California 3-day Notice of Cancellation.
Pages 18 and 20 -- Federal right of rescission (Reg Z) notice.
Pages 19 and 21 -- Explanation of the effects of rescission.
In the specs -- A description of the site and significant materials to be used.
In the specs -- Brand names if brands were mentioned during negotiations.

Add if the job includes a residential swimming pool:
Page 9 -- Checklist for homeowners -- swimming pools.
Plans and specs -- A plan and scale drawing of the pool.

Add if the job includes structural pest control:
Page 3 -- A reference to the structural pest control inspection report.
Page 7 -- A lien notice for the owner in Bus and Prof Code section 8513.
Page 7 -- Right to contract for pest control, B and P Code section 8514.5.

Add if the job includes thermal insulation:
Page 15 -- Disclosure of insulation material, R-value and coverage area.

Add if arbitration is required to settle disputes (residential):
Page 5 -- A disclosure that disputes must be settled by arbitration.
Page 6 -- Initialed consent that disputes will be settled by arbitration.

Add if the contract includes a credit term (retail installment contract):
Page 6 -- California security agreement notice and disclosures.
Pages 16 and 17 -- Federal Truth in Lending disclosures.

Easier Still
Craftsman's Construction Contract Writer drafts perfectly legal construction contracts for every state: residential and commercial prime contracts and subcontracts, cost-plus (time & material) contracts, green LEED contracts (commercial, IT or gut-rehab), home improvement contracts, pool contracts, solar contracts and construction management (consulting) contracts. The trial version is free.

Do CM Contractors Need a License?

Last month I listed advantages of construction management (CM) contracting over traditional general contracting. For example, construction contracting is a highly regulated occupation – liens, payments, codes, inspections, bonding, insurance, etc. CM contractors avoid most of these headaches. But if your state requires construction contractors to be licensed, do CM contractors need a license?

That’s a very good question. Remember that CM contractors are consultants. They don’t install materials and don’t have subcontractors. Why would they need a license?

Don’t answer that question before looking carefully at the licensing statute in your state. Usually the term construction contractor is defined very precisely. Sometimes that definition includes construction management and sometimes it doesn’t. For example, Washington D.C. Code of Municipal Regulations § 17-3999 requires that construction managers comply with all standards that apply to general contractors. The same is true in Virginia. VA Code Ann, § 54.1-1100.

Licensing statutes in other states don’t mention construction management. That leaves the issue open for courts to decide. Tennessee courts have decided that CM contractors need a license (Lowrey v. Tritan Group Ltd., 2009 U.S. Dist. LEXIS 60312). The same is true in New York (Liberty Management & Construction v. Wasserman, 1996 U.S. Dist. LEXIS 4408).

California courts have decided (at least for now) that CM contractors don’t need a contracting license. If you’re interested, the case is The Fifth Day, LLC v. Bolotin. The case was decided in March of 2009 by a court split 2 to 1 and includes a well-reasoned dissent. Expect the Bolotin decision to be overruled the first time a homeowner brings suit against an unlicensed CM home improvement contractor.

In other states where general contractors need a license, the licensing of CM contractors will remain an open question until the legislature speaks or a court has to decide the issue.

Even if your state doesn’t require a license, I think there are at least three reasons why a CM contractor should have the same license that a general contractor needs. First, having the appropriate license is reassuring to everyone concerned – the owner, trade contractors, suppliers, lenders and design professionals. Second, I believe courts and legislatures are going to recognize the growing popularity of CM contracting and close any loophole that permits CM contractors to work without a license. You don’t want to be caught in that loophole just when the loophole gets plugged. Finally, the penalty for operating without a license is severe. In many jurisdictions, an unlicensed contractor has no right to collect and no lien rights. Don’t take that risk.

Construction Contract Writer drafts CM contracts that comply with both federal law and the law in your state, regardless of the type of construction – residential, commercial or home improvement. The trial version is free.

Paper Contracting

When you hear the term paper contractor, it’s usually in the context of someone being “only” or “just” a paper contractor. I believe this prejudice against general contractors working as consultants is breaking down. And for good reason.

What was known as paper contracting in the last century has morphed into construction management (CM) contracting in the 21st century. CM contracting is replacing traditional construction contract practice on many types of projects -- from the largest public and private jobs to small home improvement projects. Traditional construction practice (prime contractor and subcontractor) has disadvantages that every traditional prime contractor knows all too well: risk of loss, oppressive state regulation, warranty problems, construction claims and callbacks. Modern construction managers avoid most of these hazards by limiting their responsibility to what they do best -- construction management. CM contracts leave the construction headaches to others -- liens, trade disputes, slow payment, code compliance, inspections and government regulation.

What is a construction manager (a paper contractor)? That’s easy. A construction manager earns a fee as a consultant:
Reviewing the plans and specs.
Preparing bid packages and evaluating bids.
Checking insurance coverage.
Approving the proposed contracts.
Communicating with contractors and suppliers.
Monitoring day-to-day construction.
Keeping the owner informed of progress.
Approving payment requests.
Assisting with change orders.
Protecting the owner from construction claims.
Directing project closeout.

What's NOT included in a construction manager’s portfolio? That’s easy too. The construction manager earns a fee for consulting services -- period. The construction manager neither buys nor installs materials, has no contracts with the trades and pays no bills. The owner signs contracts with trade contractors, pays all the bills and holds installing contractors responsible for their work.

Most of a construction manager’s task will come as second nature to an experienced general contractor. What won’t come easy is the construction management contract itself. CM contracts are very different from traditional prime contracts -- and have to be drawn precisely to avoid problems with property owners, trade contractors, suppliers and state regulators.

The recent case of Thurber Lumber Co. v Marcario underscores my point. Joe Marcario agreed to manage construction of a new home for Don Nenninger in Suffolk County, NY. Marcario ordered materials from Thurber Lumber and recommended trade contractors for the job. Marcario forwarded bills from subs and suppliers to Nenninger and Nenninger paid those bills directly. That worked fine until Nenninger ran into trouble with financing and stopped making payments. Thurber Lumber sued both the contractor (Marcario) and the owner (Nenninger) for $59,391.51. 

The court didn't accept Marcario's claim that he was working as a paper contractor (consultant), not a general contractor. Marcario could have made his CM status clear by giving Thurber a summary of his CM (consulting) contract before placing the first order. A CM contract would have left no doubt that Nenninger alone was liable for materials delivered to the Nenninger job. But Marcario didn’t have a written CM contract. And that was Marcario's $59,391.51 mistake. 

The court found Marcario liable for materials Thurber Lumber delivered to the Nenninger job -- just as if Marcario had been the general contractor, not a consultant.

Moral to the Story
Don’t try CM contracting without a good CM contract. Construction Contract Writer drafts CM contracts legal in any state and for any type of work. The trial version is free. And 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.

Green Construction Contracts

If you haven’t been asked to sign a “green” construction contract yet, I expect it will happen in 2011.

LEED (Leadership in Energy and Environmental Design) standards encourage conservation of resources through better design and construction of commercial and residential buildings. LEED is a voluntary program. But about a quarter of all construction now incorporates LEED standards. California’s new Green Building Code (effective 1/1/11) is sure to raise that percentage.

A building can qualify for one of four LEED certification levels (certified, silver, gold or platinum) based on a point system that considers site management, conservation of resources and material selection.

Most LEED points (referred to as "credits") are awarded for meeting design standards. But an owner who wants a project to qualify for LEED certification will require that contractors: (1) develop and implement a plan to reduce waste and pollution, (2) recycle construction debris and (3) favor certain types of materials.

For other than residential buildings, an independent commissioning authority (CxA) leads the certification process. The CxA develops design specs intended to meet LEED standards. A different CxA may monitor actual construction. When work is complete, the CxA will verify compliance by writing a commissioning report that qualifies the project for certification.

Both single family and multifamily homes and both new construction and gut-rehab of existing dwellings can be certified. A LEED for Homes Provider will review the plans before construction begins and arrange for inspections during construction by a Green Rater. When the project is complete, the Provider will submit a final LEED checklist to the U.S. Green Building Certification Institute.

What’s different about a LEED (“green”) construction contract?
Plenty. The agreement will require that the contractor develop and implement a site management plan and favor certain types of materials. You’ll probably have to deliver compliance data with each request for payment and send a representative to LEED conferences with the CxA or Green Rater.

On commercial new construction and tenant improvement jobs, the contract will require (1) compliance with waste management standards, (2) re-use of materials, (3) a minimum recycled content in materials and (4) use of wood with a certificate of origin. A contract for residential work will cover all of these issues plus requirements for managing the site and material-efficient framing – usually a waste factor limit, detailed framing documents, a detailed cut list or off-site fabrication.

Note another important point: A prime contractor on a LEED project has to write subcontracts that pass these same LEED obligations on to subcontractors.

Need a sample green contract or subcontract? The free trial version of Construction Contract Writer comes with a sample LEED contract and will draft green contracts for commercial, TI and residential projects. 

Prompt Payment on Construction Contracts

On January 1, 2011, Arizona will join a growing list of states that offer an effective remedy against slow payment on private construction contracts and subcontracts. If you build in Arizona, or in any of the other states with a prompt payment statute, you should understand how to preserve and enforce payment rights.

Of course, the law in every state is at least slightly different. But Arizona offers a good example of how a prompt payment act works. If work on the prime contract will require at least 60 days, Section 32-1129.01 sets payment standards for both residential and non-residential construction: (1) the billing cycle, (2) certification of invoices, (3) payment due dates, and (4) retention and final payment.

Billing Cycle: The prime contractor has to submit an invoice each 30 days for work done during the prior 30 days -- § 32-1129.01 (A).
Certification of Invoices: Invoices for progress payments, final payment and retainage are considered approved by the owner 14 days after delivery unless the owner objects in writing. § 32-1129.01 (D), (H) and (K). There are nine statutory objections, grounds for withholding payment. § 32-1129.02 (C)
Payments Due: Progress payments and final payment must be made and retention must be released by an owner within seven days after an invoice is approved. § 32-1129.01 (C), (I) and (L).
Retention and Final Payment: The contract can give the terms “retention,” “substantial completion” and “final completion” a meaning other than what appears in § 32-1129 and can set different payment dates and conditions for final payment and release of retention.

To use any billing cycle other than 30 days, both the contract and each page of the plans must include the notice in § 32-1129.01 (B). To allow more than 14 days for certification of invoices, both the contract and each page of the plans must include the notice in § 32-1129.01 (F). To extend the payment due date beyond seven days, both the contract and every page of the plans must include the notice in § 32-1129.01 (C). Alternate arrangements for retention and final payment are permitted if each page of the plans and the contract include the notice in § 32-1129.01 (W).

The new Arizona law has teeth
Failure to comply with payment deadlines can result in an interest charge of at least 1.5% per month (or fraction of a month). Plus, courts and arbitration panels are required to award attorney fees if suit is necessary to collect. § 32-1129.01 (Q) and (S).

But there’s a trap for residential prime contractors. If the job consists of Work on an owner-occupied dwelling, the first page of every billing and estimate has to include the notice which appears in § 32-1129.07. Omit that notice and you forfeit protection of the Act.

Note also that subs have to be paid within seven days after the prime contractor is paid. Subcontractors can request notification from the owner when the prime contractor is paid. Subcontractors have the same right to collect interest and attorney fees if a payment is delinquent. § 32-1129.02 (B).

Arizona’s Prompt Payment Act of 2010, is effective on the earlier of either:
1. January 1, 2011 if plans are distributed to a contractor or subcontractor after that date, or
2. January 1, 2012 for every construction contract signed after that date.

To see how Arizona's new Prompt Payment Act affects your jobs, have a look at Arizona Construction Contract Writer. There's no charge for the trial edition.