Tips for Solar Contractors

Most of solar installation contracts I've seen are pretty weak. They don’t cover the essentials and won’t hold up in court. Here’s why.

Solar installation is construction contracting. No state exempts solar work from compliance with construction contract law. From what I’ve seen, solar contractors don’t understand that yet. Whether structured as a lease, a power purchase agreement or outright sale, every solar installation contract needs the same notices and disclosures required for a residential remodeling contract. That’s black letter law. 

But solar contracts have to be different. Conventional construction is sold with a cost estimate. Solar jobs are sold on a forecast of cost savings. Solar contractors use Web tools such as Energy Periscope  to work up the savings forecast.

Just plug in the numbers to get a persuasive sales packet – usually with cost savings in the thousands. Then total the financial incentives, rebates and credits listed for your community at http://www.dsireusa.org/. Most likely, your client will be a good candidate for solar.

What comes next is harder: The installation contract. Why? Because with solar, the cart goes before the horse. You start with a signed contract based on the forecast of savings. Then you draw plans and do the engineering.

Why get a signed contract before plans are final? That’s easy. Putting the job together takes time and costs money: approvals and commitments (utility company, HOA, building department), engineering and a site audit. Don’t start planning a job without a signed contract and a deposit.

As I said, solar installation contracts are different. I’ll tick off the essentials.

Nail down the assumed power savings. Every solar job starts with estimated savings. Suggest that savings will be X+Y and actually deliver savings of X alone and you’re in trouble – even if the contract doesn’t include a guarantee. (More on guarantees later).

Your forecast of power generated by a photovoltaic (PV) system is pure solar engineering. Enter the numbers accurately in any of the financial modeling programs linked above and you’ll get a good power forecast. But to forecast cost savings, you need an estimate of power consumption. Pick one of four ways, listed here in order of decreasing reliability:

• The annual average of 3 years of actual power used as reported on utility statements.
• One year of actual power used as reported on utility statements.
• The square feet of living area multiplied by published averages (such as by the EIA).
• A guestimate of the annual power cost divided by the average cost of electricity.

Your contract should identify which method was used in the forecast. It’s OK to be way off in a power consumption estimate – so long as your contract is clear that the forecast was based on figures supplied by the property owner.

To protect yourself, reference the forecast of power savings in your contract. Leave no doubt about how you estimated the savings.

Exactly what gets installed? Conventional construction contracts reference a set of plans and specs. But with solar, the cart goes before the horse. Eventually there will be working drawings and specs for a solar job. But that’s not going to happen before you ask for a signature on the contract. So your contract has to list what gets installed. Fortunately, that’s a short list:

• Number of panels
• Panel manufacturer and model
• Number of inverters
• Inverter manufacturer and model
• Manufacturer of the mounting system
• Vendor of the monitoring system

That’s about all you need to bid the job. If something changes later, such as in engineering or during the site audit, be sure there’s a contract clause that covers substitutions. More on that later.

Cover solar incentives and permits. Incentives, credits and rebates all belong to the owner. Your forecast of cost savings should pile these on as deep as the law allows. But cover two points in your contract.

1. Solar incentives change and expire. Don’t guarantee any specific credit or rebate. Your client should have the right to cancel if incentives evaporate. That right should expire once the permit is issued.
2. You need the right to apply for incentives, rebates and credits in the name of the owner. Cashing in on these incentives takes time and persistence. Don’t depend on the property owner to get it right. The same is true for permits and approvals, such as from an HOA or a utility company.

Cover interconnection issues. You’ll do the actual connection. The utility company will retain ownership of lines connecting your solar equipment to the power grid – and will probably want a utility easement so they can service installed equipment.

What about the service entrance panel? This is where even experienced solar contractors stumble. The existing breaker box is always a question mark when planning a solar job. Either it needs major work or it doesn’t. Replacing the existing box can add $2,000 to the cost of a residential solar project. An electrical engineer, the utility company and maybe the building inspector will make the decision later. So your contact has to cover the contingencies. Either:

1. You’re sure the existing panel is OK. The contract price doesn’t include anything for work on panel, or
2. You expect the panel will need work but haven’t included that cost in the contract, or
3. The panel will have to be replaced and the contract includes an allowance to cover the cost.

There will be changes. Contracts for solar energy projects are signed before the site audit and final engineering. Occasionally, the need for a change in the contract will become obvious – either in selections of materials or in project design. For example, panel specs and availability can change. Make sure your contract explains how to handle changes.

Be specific on project closeout. Work is complete when you pass final inspection. A green tag from the inspector means the system can start delivering power. Commissioning by the utility company qualifies your client for incentives. But the utility company may not be in any hurry to schedule the commission test. Months may pass. The contract should be clear: Final payment is due when you can show power production as predicted in the forecast of savings, not when the utility company commissions the project.

Offer to maintain the system. Every solar energy system requires maintenance. That raises two contract issues. First, it’s an opening to offer a service contract. Quote a price for annual maintenance right in the installation contract. Describe what’s covered and what isn’t. Second, disclaim liability for system performance if maintenance isn’t done annually by qualified personnel.

 Guarantee the solar savings. Your forecast of savings made the job possible. Why not put your money where your mouth is? Guarantee those savings. That’s common on commercial solar jobs. It works just as well on residential jobs. There’s little risk if the guarantee is written correctly.

Remember, I said that production of a PV system is pure solar engineering – very predictable unless there’s a train wreck. Exclude responsibility for train wrecks and there’s little risk you’ll have to cover a shortfall.

Guaranteed savings will be very persuasive when it’s time to sign the contract. Even better, a guarantee creates extra solar business: maintenance and monitoring. Make the guarantee contingent on annual maintenance and monitoring by your company. Monitoring is automatic by wired or wireless connection between the inverter and the owner’s router or access point. That’s something else to cover in your contract. Revenue-grade monitoring will be required for net metering – the electric meter turns backward.

What about a warranty? The contracts I’ve reviewed try to dance around the issue, passing on the manufacturer’s warranty and disclaiming everything else. That’s clever. But it doesn’t cut the mustard in most states. In Kansas, for example, it qualifies the contractor for a $10,000 fine. Remember, residential solar jobs are residential construction. The warranty in a solar contract has to comply with state law, just like everything else in a solar contract.

For solar installation contracts that comply with the law in your state and touch all the bases, have a look at Construction Contract Writer. The trial version is free.

But don’t let me discourage you. Solar installation contracting can be good business. Solar is growing. It’s easy to understand why. A Federal tax credit covers 30% of your client’s cost. Rebates, incentives, lease deals and power purchase agreements can reduce up-front cost to near zero. And the cost of solar arrays drops 10% nearly every year. With benefits like that, many contractors should think solar.

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.