Living with Pennsylvania's HICPA

My March2009 blog suggested that Pennsylvania's Home Improvement Consumer Protection Act (HICPA) didn’t have to be a deal breaker for residential contractors in PA. The law (effective July 1, 2009) was written to tip the playing field in favor of owners when negotiating for home improvement work. But the legislature in Harrisburg didn’t think of everything. There are still good ways for contractors to protect themselves. The March 2009 blog lists seven good ways to cut your risk on Pennsylvania home improvement jobs.

Some of HICPA makes good sense, starting with a requirement for written, professional-grade contracts. A simple handshake isn’t enough. Pennsylvania home improvement contracts have to explain exactly what’s included and what’s excluded. When should work start and when should it be done? When are payments due? There’s a limit on down payments. You have to list subs and their phone numbers. Change orders have to be in writing. I like that. And you should too. The best way to avoid disputes is with a professional-grade contract.

But don’t be confused. Boilerplate contracts sold by the professional trade associations aren’t professional-grade for HICPA purposes. Contracts for home improvement work in Pennsylvania have to be written specifically for Pennsylvania. HICPA makes the entire contract unenforceable by the contractor if any of ten common clauses appear in the document. The poisonous ten includes hold harmless clauses and terms that award attorney fees to a contractor. Clauses like these appear routinely in trade association contracts.

Changes to HICPA

The law was amended in July 2011 to cut big box stores some slack. Major retailers like collecting in full before work starts. The attorney general didn’t consider that when drafting the 2009 law. So the law was changed last July to accommodate big box retailers.

And now a Pennsylvania court has jumped in, interpreting HICPA for the first time. The case is Gelacek v. Lunz, 2012 Pa. Dist. & Cnty. Dec. LEXIS 6. The owner, Dr. Gelacek, refused to make final payment on a room addition to his home on River Road in Freeport, PA, basing his refusal on non-compliance with HICPA. The contractor, Lunz, argued that HICPA doesn’t apply to room addition jobs. Room additions are new construction, reasoned Lunz. Construction of a new home is specifically excluded from coverage under HICPA.

True, the law’s definition of home improvement omits any mention of additions to a home. According to HICPA, home improvement is any “repair, replacement, remodeling, demolition, removal, renovation, installation, alteration, conversion, modernization, improvement, rehabilitation or sandblasting.” Judge Valasek had a different opinion, ruling that HICPA applied and Lunz was out the final payment of $31,559.76.

I see two take-aways from this case. The first is obvious. Room additions are home improvement even though the law doesn’t say so. The second is more subtle. The contractor, Mark Lunz, made a contractor’s worst mistake, agreeing to extras without a written change order. Dr. Gelacek and Lunz had a written contract for $118,805. But Lunz agreed to changes that added $163,495.51 to the job – without any written agreement whatsoever. Lunz felt he had an oral contract for time and materials for the extras. That doesn’t work under HICPA for two reasons. Both oral agreements and cost-plus contracts are illegal for home improvement work in Pennsylvania -- an expensive lesson for Lunz.

A Better Choice

Good HICPA contracts are easy with Construction Contract Writer. Written change order forms are included. CCW even writes cost-plus (GMP) contracts and owner’s representative (consulting) contracts. All comply precisely with Pennsylvania law. The trial version is free.

If you’ve been a contractor for a while . . .

You know about headaches that come with any project – risk of loss, regulation, code compliance, employees, warranty claims, liens, and – always – the need for more capital.

If you’re looking for a better way to make a living in construction, consider a contractor I know. He doesn’t have these problems – and still makes a good living as a residential contractor.

He gets involved early in the project, before plans are drawn. He works with the architect, gets owner approval of the plans, guarantees a maximum price, selects trade contractors, makes sure work is done right -- and then collects a little extra for finishing under budget. It’s a good business. But it’s not a general contracting business. It’s a consulting contractor business: no employees, no inventory, no payables, no warranty, no investment, no liens, no risk.

His clients are very comfortable dealing with consultants – lawyers, accountants, financial advisors, etc. In their eyes, he’s just another consultant, a construction consultant.

Is this legal?

Of course. No state requires that general contractors have employees and payroll. In fact, the deck is stacked against any general contractor with large crews: worker’s comp insurance, high overhead, high payroll taxes and liability insurance premiums.

Is anyone really doing this?

It’s the way most federal, state and municipal jobs are done today, including many of the largest projects, e.g. the Corps of Engineers. Many commercial and residential jobs are run by consulting contractors – sometimes called paper contractors. Some of the most experienced, most successful, most respected construction professionals I know fit the definition of paper contractor. And for good reason.

A consulting contractor is the owner’s representative – answers only to the owner. 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.

But understand one point. Construction consultants walk a fine line. A construction consulting contract has to be very different from any construction contract you’ve ever seen. Refer back to my January 25, 2011 blog and you’ll understand the problem.

Finding work as a construction consultant

It’s not hard. In fact, it’s good practice to suggest consulting on any job you bid. The pitch goes something like this:

I can save you some money on this job. I’ll act as your consultant at a price my competition can’t touch. There’s zero profit for me in this job. Just pay me for my time. I’ll give your job the same attention I give to every project I take on, but with no markup. You can’t beat that deal. Say the word and I’ll write up a contract we both can live with.

If working as a consulting contractor appeals to you – and if you aren’t exactly sure how to do it – consider a book published by Craftsman. The title is Paper Contracting. The co-author, William D. Mitchell, has completed over 100 projects as a construction consultant – everything from home remodels under $100 thousand to government projects worth over $100 million.

Paper Contracting could open your eyes to a better way to do construction business. The download is less than $30.

Illegal Construction Contracts

All states set standards for construction contracts. The notices and disclosures required by state law vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. 

Some of what states require in construction contracts is pretty trivial stuff. For example, a contract may not be legal if a notice is in less than 12 point bold type or is printed someplace other than just above the signature line. Or, failure to specify when payments are due and the amount due may make a contract illegal. It’s easy to make a mistake. What happens then? If the contract is illegal, does the contractor lose the right to collect?

Two Connecticut cases shed some light on that question. Both cases were decided on the same day, January 19, 2012. Both jobs were done under Connecticut’s Home Improvement Act. In both cases, the owner wasn’t satisfied with the work and refused to make final payment. In both cases, the owner raised the issue of an illegal contract when the contractor filed a lien to collect the full price. The contractor won the first case. The owner won the second. Here are the details.

Zunda v. Hess Construction (2012 Conn. Super. LEXIS 198) involved a $700,000+ job and was heard by a court in Stamford. The contract omitted the transaction date, the commencement date and a notice of cancellation. All are required by Connecticut law. Plus, the contract wasn’t signed by the owner’s spouse.

Currier v. McCue (2012 Conn. Super. LEXIS 169) was heard by a court in New Haven and involved a job with $51,845.45 in financing. The signed "Homeowner/Contractor Agreement" didn’t describe the work to be done. Again, that’s required by Connecticut law.

Both courts found the contracts to be defective -- not in compliance with Connecticut law. But that’s where the similarities end. The New Haven court ruled that the contract was void. The lien was discharged. The contractor was out the final payment due under the agreement. The court in Stamford found defects in the contract to be “technical.” Hess Construction could collect the full amount due.

What’s the difference?

The New Haven court simply applied the law as written. Period. “No home improvement contract shall be valid or enforceable against an owner unless . . .”

The Stamford court found that substantial compliance with Connecticut law was enough. “The legislature intended the Act to protect homeowners from unscrupulous contractors not to lead to unworkable and unjust results. . . The homeowners here were not prejudiced in any way by the Contractor's failure to comply technically with the Act.”

My point here is that no contractor should have to depend on a judge’s decision to collect what’s owed. You won’t make a dime on a job if collection requires two years of litigation. Whether you’re building in Stamford or New Haven or anywhere else, don’t give an owner excuses to withhold final payment. Use contract forms as complete and professional as your work on the job.

Fortunately, that’s easy: Construction Contract Writer drafts construction contracts that comply with your state law. The trial version is free.

E-Sign Your Construction Contracts

I’ve been asked, “Can I get my contracts E-signed -- send my contract to a client as an email attachment, get an electronic signature and then have the E-signed contract emailed back to me?”

The short answer is “Yes.” And it makes good sense. If you draft contracts with your computer, it’s easy to get E-signatures from clients. No printed contract required. No program to install on your computer. It’s quick, costs nothing extra and is perfectly legal. If you’re E-filing tax returns, you’re already E-signing documents. If you haven’t tried E-signing construction contracts yet, you’ll be surprised at how convenient it can be.

To Get Started E-Signing

Search on the Web for “Free E-sign.” You’ll find a dozen or more vendors offering free or low-cost ways to E-sign contracts. I’ll use OneSpan to explain how it works. There’s no charge if you E-sign ten contracts or less per month.

Start with a contract in either PDF or RTF (MS Word) format on your computer. If you use Construction Contract Writer, that’s easy. Then go to OneSpan.com. Enter your email address and name to create a new account. Assign a secure password. (Security is an important issue when E-signing.) Then click to create an E-sign Room. You’ll need one E-sign Room for each contract. Give the room a name, such as “Jones Contract.”

Now you’re ready to upload the contract to be signed. Click “Add document” and then “Browse” to find the contract on your computer. Click to upload. When the upload is complete, click on the contract file name. You’ll see the full document.

Now identify who is going to sign the contract. Click “Add signer” and enter the email address and name for each person who will be signing. Scroll down the contract to where a signature is needed. Click “Add Signature.” Then drag and drop the signature block on the signature line. Do the same for each signature in the contract. When done, click “Send.”

Each signer will receive an email notice that the contract is ready to E-sign. Each signer clicks a link in the email message to see the contract. Then click the yellow sticky note in the contract to add a signature and the date. When you and your clients have signed, all get an email notice and can print the contract. Simple.

A few points to note:

• E-signing won’t work for anyone who doesn’t use email and the Web.
• You can draw a “signature” with your mouse. But a written signature isn’t required.
• A new E-sign customer has to create an account before E-signing the first time.
• Be sure to drop a signature block everywhere a signature is needed in the contract.
• Don’t send a contract out to be signed until it’s exactly the way you want it.
• Any attempt to alter a signed contract will invalidate the digital signatures.

Another important point. Consumers have to receive a disclosure notice and E-sign a consent form before E-signing their first contract. Both the notice and consent form can be delivered automatically with the first contract.

Why Contractors Like ADR

Construction disputes usually start with a surprise – something nobody considered. A good contract anticipates the most likely surprises. But no contract is perfect. Occasionally you’re going to have a dispute.

If you write the contract, you decide how disputes will be settled – either in court or by arbitration. If your contract requires arbitration, usually called alternative dispute resolution or ADR, the arbitrator’s decision will be final. There’s no right to sue. That can be an advantage. Arbitration is usually faster and cheaper than litigation. Many arbitration cases are decided on written statements alone. Statistics show that merchants usually win and property owners usually lose in arbitration. That makes arbitration a good choice for construction contractors. An arbitration clause in your contract adds leverage when an owner (or the owner’s attorney) threatens to sue.

But There’s a Problem.

Eleven states void any arbitration agreement in a residential construction contract that omits disclosures required by state law:

• California -- Business & Professions Code § 719
• Illinois – Title 815 Illinois Compiled Statutes § 513/15.1
• Maryland -- Code of Maryland Regulations § 09.08.01.25.
• Massachusetts -- General Laws 142A, § 4.
• Missouri -- Revised Statutes § 435.460
• Nebraska -- Revised Statutes § 25-2602.02.
• Oregon -- Administrative Rules § 812-012-0110-1-f.
• Pennsylvania – Title 73 Pennsylvania Statutes Section 517.7
• South Carolina -- Code Annotated § 15-48-10(a).
• Texas -- Property Code § 420.003.
• Vermont -- Title 12 Vermont Statutes Annotated § 5652

The disclosure statement required is different in every state: the exact words, all upper case, underlined, signed or above the signature line, etc. Without the precise disclosure required by state law, your agreement to arbitrate isn’t going to be enforced. That’s a trap for the unwary. Don’t get caught.

What’s in an Arbitration Clause?

No state or federal court will touch a dispute about a contract that includes an arbitration clause – an agreement to settle disputes using private ADR rather than public courts. Your arbitration clause should identify who will do the arbitration (such as the American Arbitration Association or Construction Dispute Resolution Service) and the arbitration rules that apply.

Federal law and policy favor arbitration. State limits and restrictions on arbitration, such as in the eleven states listed above, have been invalidated when the subject of the contract included interstate commerce. And nearly all construction includes materials from out of state. Still, the easiest and cheapest way to get into arbitration (and stay out of court), is to comply with your state law.

Construction Contract Writer makes that easy. If your preference is arbitration and if you do work in one of the eleven states listed above, get the trial download. It’s free.

Insurance Repair Work in Illinois

Starting January 1, 2012, residential contractors in Illinois have to jump through another hoop.

If any part of a job may be covered by insurance proceeds, section 513/18 of Illinois’ Home Repair and Remodeling Act will require a special notice in the contract and extra cancellation forms. Section 513/18 applies if:

• The work is on an existing residential building with from one to six units, and
• The work is valued at $1,000 or more, and
• Repairs are needed because of damage from a “natural occurrence” and
• More than one residence was damaged by this natural occurrence, and
• Part of the work may be covered by proceeds from property insurance.

If § 513/18 applies, a contractor:

1. Can’t offer a discount on the insurance work.
2. Can’t help the homeowner file an insurance claim.
3. Has to include a roofing contractor’s license number in the contract.
4. Can’t start work until the insurance claim is resolved.

This doesn’t make sense on several levels:

1. Contractors should be encouraged to give discounts.
2. Some homeowners need help preparing claim forms.
3. Not all catastrophe repairs require a roofer.
4. Homeowners need the right to start repair work before their claim is settled.

Ready, Fire, Aim

Illinois has a reputation for legislating first and regretting it later. Until the Home Repair and Remodeling Act was “fixed” last year, a violation of the law left contractors with no right to collect. For example, in Smith v. Bogard, a contractor who forgot to give an owner the state’s two-page consumer protection brochure lost all rights: The contract was unenforceable, lien rights were void and there was no recovery for unjust enrichment. That opened the door to all kinds of mischief by owners operating in bad faith. The Illinois State Bar, the office of the Illinois Attorney General and the legislature in Springfield stewed about that for a while and decided that wasn’t what they intended. So HRRA was “fixed” last July, allowing enforcement of lien rights and recovery for unjust enrichment.

Now comes the new section 513/18. Sub-section (f) requires a boldface notice in the contract. Sub-section (g) requires a new cancellation form – in duplicate – attached to the contract. This is in addition to the usual Reg. Z (three-day) cancellation form. I have no problem with either the notice or the attachments. Contractors know their contracts have to be letter-perfect. But there will be unintended consequences from sub-section (e). An owner has the right to cancel the contract at any time up to the earlier of:

• Five days after the insurer has denied any part of the claim, or
• Thirty days after the homeowner has delivered a proper proof of loss to the insurance carrier.

After cancellation, the contractor has ten days to make a full refund – even if repairs are already complete!

So what’s an insurance repair contractor supposed to do? I have three recommendations:

1. Write the contract now. But don’t start work until the insurance claim is settled.
2. If only part of a job is covered by insurance, put that part on a separate contract. Write another contract for the remainder of the job. Start work on the non-insurance work when you’re ready.
3. Explain section 513/18 to the owner. Until the carrier settles, your hands are tied. All you can do is prevent further damage – but only if the owner agrees in writing.

As long as there’s a right to cancel, repairs are on hold. That benefits no one. Better to let an owner acknowledge in the contract that their insurance claim may be denied. Then get on with the work. A “fix” like that benefits everyone. But until the legislators in Springfield make that change, Illinois contractors have to follow the law as written.

If you’re using Construction Contract Writer, your program will revise automatically when the new Illinois law goes into effect. If you’re not using Construction Contract Writer, the trial version is free.

A.I.A. Contracts vs. ConsensusDOCS

In April 2009, Bennett Builders signed a contract to remodel the Stamford, CT home of Tarun Mehta. It was a cost plus job at a price not to exceed $446,900. Under the agreement, work was to be completed by October 2009. Over a year later, work still wasn’t done and Mehta terminated the agreement. Bennett filed suit for $31,754.94 still due on the contract and asked the court for a pre-judgment remedy, an attachment of $32,000 on Mehta’s home.

This should have been a good job for Bennett Builders. They stood to earn a fee of $31,500. Even if the court denied payment in full under terms of the contract, Bennett should have been able to collect for the value of materials and labor that went into the job. Unfortunately, it didn’t work out that way. Bennett had made a serious mistake, using an A.I.A. contract.

The 17-page contract Bennett and Mehta signed was essentially the American Institute of Architects ("AIA") Document A107-1997 "Abbreviated Standard Form of Agreement Between Owner and Contractor for Construction Projects of a Limited Scope Where the Basis of Payment is a Stipulated Sum." Go to the A.I.A. site and you’ll discover that A.I.A. contracts are “accepted, reliable, fair and flexible.” Fine. But here’s what the A.I.A. doesn’t explain. A.I.A. construction contracts don’t comply with either state or federal law. In most states and for most jobs, a contractor who works under an A.I.A. contract risks serious legal trouble. That’s exactly what happened to Bennett Builders.

On September 23, 2011, the Connecticut Superior Court denied Bennett Builders any relief – nothing under the terms of the contract and nothing for the value of goods and services that went into Mehta’s home. Why? The law is clear. Connecticut’s Home Improvement Act and Connecticut’s Home Solicitation Sales Act require a notice of cancellation in at least 10 point bold type. The A.I.A. contract doesn’t comply with Connecticut law and won’t be enforced by Connecticut courts. You can read the case at 2011 Conn. Super. LEXIS 2481.

I’m often asked to make a recommendation. Which is better for builders, A.I.A. contracts or ConsensusDOCS? I can’t recommend either. Neither includes the notices and disclosures every state requires in construction contracts. These notices vary with the size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. 

To avoid sharing the fate of Bennett Builders, take a look at Construction Contract Writer. The trial download is free – and complies precisely with both federal law and the law of your state.