Oral Change Orders

Every construction project deserves a written contract. For residential work, 31 states and the District of Columbia require a written agreement.

But what about contract changes? Is a written change order required every time you do extra work?

First, let’s get real. Oral change orders are poison. The worst construction contract disputes I’ve seen are jobs with dozens of changes and little or nothing in writing. If there’s a falling out with the owner, every oral change to the contract comes into play. Who said what and when? At what price? Don’t get into a mess like that.

But suppose you forgot to get a written change order. Can you still collect? The answer is “yes,” but with some important qualifications.

Four states (CA, ME, NJ, PA) and the District of Columbia require that changes in home improvement contracts be in writing. Without a written change, contractors have no right to collect the contract price. But notice the words “contract price.” I’ll get to that shortly.

In the other 46 states, you have the right to collect something for changes, even if the contract specifies that change orders have to be in writing. An owner can’t sit back until work on an oral change order is done and then refuse to pay. That’s the rule in most states, including: AL, CO, CT, FL, HI, IA, ID, IN, KY, LA, MD, MN, MO, MS, NC, NV, NY, OH, OR, RI, SC, SC, TN, UT, VT, WA, WV.  An owner who knows about a change and doesn’t object is going to have to pay for extra work.

But don’t expect to collect the full contract price. When there’s no written agreement on a change, the law implies a new contract for the reasonable value of any extra work. You’ll have to prove reasonable value: the cost of labor and materials plus something for profit. That’s never easy. But it can be done.

The Best Plan

Include a blank change order form in your contract. That's required by law for home improvement work in California and Maine. If you use Construction Contract Writer, simply click a box to put a blank change order form in your contract – what’s included in the change, what’s excluded, the cost, the new contract price, and an agreement to pay in full for extra work when the extra work is done. 

When you agree to make a change to any job, whip out that form and start writing. There’s a space on the form for an owner’s signature. Getting a signature is best. But simply delivering an unsigned form to the owner should be enough to seal the deal. Absent special circumstances, failure to object to a written change order is as good as accepting the change. That’s the law.

Fair Warning for New York Contractors

The state of New York doesn’t license construction contractors. But don’t be confused. Staying out of legal trouble in New York isn't simple. Here’s why:

Because construction contractors aren’t licensed by the state, New York cities and counties are free to do the licensing. And several do. For example, the City of New York licenses home improvement contractors. Nassau County, Rockland County and the City of Long Beach also license contractors.

New York courts cut no slack when enforcing these license laws. If you don’t have a license, it’s simple. You’re not going to collect a dime. Case closed. Courts won’t do anything to enforce agreements made by unlicensed contractors. Maybe worse, unlicensed contractors are subject to having their vehicles impounded. It happens.

Incidentally, all this could change. New York Assembly Bill 595, introduced January 8, 2014, would require home improvement contractors to be licensed state-wide. A similar bill died in the legislature last year. But this year, who knows?

More to the Point

But even in cities and counties where no license is required, New York State lays out an obstacle course for construction professionals.

Commercial work -- New York General Business Law § 756-a sets the standard for every contract. If you don't cover key points like payment date, validity of invoices, grounds for disapproving an invoice, grounds for stopping work or several other topics, § 756-a fills in the details, maybe not what you intended. To keep New York General Business Law § 756-a out of your contracts, make sure your agreements cover all the bases.

Residential work -- New York General Business Law § 771 lists what has to be in your contract:

(1) Your name, address, telephone number and license number, if applicable.

(2) The start date and the completion date.

(3) A list of subs and suppliers.

(4) Notices about trust accounts for subs and the right to cancel.

(5) A progress payment schedule.

New York courts take § 771 very seriously. The case of Carrea & Sons, Inc. v Hemmerdinger proves the point. Carrea, the contractor, wrote the contract. Hemmerdinger signed on the dotted line. But when it came time to collect, the homeowner had complaints and didn’t want to pay. Carrea sued. The court never got to hear Carrea explain that he did the work and deserved to be paid. Instead, the owner insisted that Carrea’s contract was illegal. There wasn’t a beginning date or a completion date. And two notices required by § 771 were omitted. That’s all the court needed to know. Case closed. The contractor collected nothing. The court’s November 24, 2013 decision should serve as a caution for all New York contractors. In the words of Judge Latwin:

It is always the contractor who prepares the contract. It is their business to do so. It is their obligation to prepare the contract in compliance with the law. If they fail to do so, it is the contractor who should bear the burden, not the homeowner . . . Enforcing the alleged contract would violate the very public policy considerations giving rise to the statute's enactment.

If you're serious about drafting perfectly legal construction contracts for work in New York, have a look at Construction Contract Writer. The trial version is free.

2014 Construction Contract Law

Twenty-five states have made changes to construction contract law in the last six months. Some of these changes are trivial. Others will affect contracts for most jobs in a state. The highlights:

Arizona Revised Statutes § 34-227 voids any provision in a contract which would make public works construction in Arizona subject to the laws of any other state.

District of Columbia has set payment deadlines for both prime contracts and subcontracts. Late payment earns interest at 1.5% a month plus attorney fees. 60 District of Columbia Regulations § 11812 voids any clause in a subcontract which would waive the right to file a lien or collect on a payment bond.

Hawaii allows only contractors to apply for building permits on most residential jobs unless the owner qualifies for an exemption. Hawaii Revised Statutes § 444-23.

Maryland now requires three specific notices in home repair contracts. Code of Maryland Regulations § 09.08.01.26

Massachusetts has repealed a code section that set a time limit for making claims for extra work on public works projects. Massachusetts General Laws 29, § 20A

New York has decided (for now) that construction management contractors on residential jobs are not required to comply with New York home improvement law. 84 Lumber Company v, Barringer, 110 A.D.3d 1224 decided October 17, 2013. Expect this decision by the appellate court to be reversed, probably by legislation, as happened in California earlier this year. Otherwise, carefully drafted construction management contracts could do an end-run around New York’s home improvement contract law, General Business Law, § 770 to 776.

Virginia has changed the notice (18 VAC 50-22 Appx. RBC) which must appear in residential contracts. Virginia Code Annotated Section 43-3-D now denies construction lien rights to anyone doing work without the appropriate license or certificate.

Utah and Wisconsin have become the 14^th and 15^th states to give owners the right to cancel a residential construction contract if:

• Any part of the work involves repair of storm damage and
• At least part of the cost of repair is expected to be covered by insurance, and
• Any part of the insurance claim is denied by an insurance carrier.

Utah Statutes § 13-50-202 is effective now. Wisconsin Statutes § 100.65 becomes effective on January 1, 2014. My blog post of November 30, 2012 lists the 13 other states that have adopted similar statutes -- all in the last three years. In most of these states, the contract has to include a notice explaining the right to rescind. Omitting the notice can earn the contractor a fine of up to $1,000.

It’s easy to be sure your contracts comply with these changes and all state law. Get Construction Contract Writer. The trial version is free.

Rocket Lawyer: Caveat Emptor

Search for “free construction contract” on the Web and you’ll find Rocket Lawyer near the top of the paid ads. You’ll probably see claims in that ad: “100% free” and “binding in each state.” What could be wrong with that?

I’ll count the ways.

“Free” is a stretch. Rocket Lawyer is a relationship marketing company. They monetize relationships – including any relationship they can develop with you. To see their “free” contract, you have to surrender an email address and your credit card number. That begins your free trial – which turns into a paid $39.95/month subscription if you fail to cancel during the first week. Is that “free”? I’ll let you decide.

“Binding in each state” isn’t a matter of opinion. It’s a matter of law. If you’re a contractor, Rocket Lawyer misses by a wide margin. I’ll explain.

Nearly every state requires specific notices and disclosures in construction contracts – especially on residential and small commercial jobs. These notices are different in every state and vary with size of the job, type of work, materials used, who signs the agreement and even where the contract is signed. Any contract that omits a required notice is likely to (1) be unenforceable by the contractor, and/or (2) expose the contractor to a fine, and/or (3) result in discipline by the license board. In some states, omitting a required notice is punishable by jail time.

So, how does Rocket Lawyer deal with special notices and disclosures required by state and federal law? It doesn’t. Rocket Lawyer’s construction contracts ignore important state and federal disclosure laws. I think that’s irresponsible, especially considering the claim that Rocket Lawyer contracts are “binding in each state.”

Some Examples

Rocket Lawyer contracts omit key notices required by state home improvement contract acts. A contractor using a Rocket Lawyer contract could face:
California – Discipline by the CSLB, including revocation of a license.
Connecticut – A $1,000 fine or 6 months in prison or both.
District of Columbia – A fine of up to $300 and 90 days in jail.
Florida – A $500 fine for omitting the Recovery Fund notice.
Hawaii – Both the contract and the contractor’s statutory lien rights are void.
Massachusetts – Suspension of registration, fines up to $2,000 and a year in jail.
Maryland – A fine of $1,000 and 6 months in jail.
Maine – A fine of between $100 and $1,000 for each violation.
New Jersey – A refund of all money collected or treble damages plus legal fees.
New York – The contractor can’t sue to collect on the contract.
Oregon – A civil penalty of up to $5,000 for each offense.
Pennsylvania – Paying the owner three times actual damages plus attorney fees.
Texas – Paying the owner a $500 penalty.

Thirteen states require special contract notices when the cost of a job is at least partially covered by property insurance. Heavy penalties apply if a contractor ignores the law. Rocket Lawyer doesn’t even consider the issue.

Many states require special disclosures when an agreement is negotiated on the job site. And federal law requires a three-day right to cancel every time you work on the primary residence of the owner. Again, Rocket Lawyer offers no help.

My advice on Rocket Lawyer construction contracts: caveat emptor (buyer beware).

Instead, consider Construction Contract Writer. You'll draft perfectly legal agreements for nearly any type of construction project in any state. The trial version is free – no strings attached.

Tilt the Contract Your Way

All construction contracts are not created equal. Most attorneys will confirm that they could write a construction contract that either:

1. Makes it nearly impossible to lose money on the job, or
2. Makes losing money on the job almost certain.

That’s called contract bias. Every construction contract has bias, favoring either the property owner or the contractor. You have better control, more options and extra security when contract bias is in your favor. Don’t believe any claim that a contract is “standard” or has no bias. There is no such thing as a standard construction contract just as there is no such thing as a standard construction project.

Here’s my list of 10 contract clauses that favor the contractor and another 10 clauses that favor the owner.

Clauses favoring the contractor:

• Anything not in the contractor’s estimate will be at extra charge.
• Design defects are corrected at the owner's expense.
• No retainage will be deducted from payments due.
• Changes required by law are charged as extra work.
• Changes will be charged at the normal selling price of the contractor.
• The contractor provides no warranty other than required by law.
• Disputes have to be resolved by arbitration, not litigation.
• The contractor gets paid for delay caused by the owner.
• Final payment is due 30 days after termination.
• Any defect not on the punch list is accepted..

Clauses favoring a property owner:

• The contract price covers job conditions as they exist.
• The contractor is responsible for hazmat found on the job.
• The owner can reject any work considered defective.
• Any ambiguity in the plans is resolved in favor of the owner.
• Final payment releases all contractor claims.
• Claims for extra work expire if not made in writing within 5 days.
• Unsatisfactory work must be removed at the contractor's expense.
• The contractor provides a broad form warranty on all work completed.
• The contractor is liable for any loss suffered by the owner (indemnity).
• The contractor has to pay for any corrections required by law.

Contract clauses like those above can create a very one-sided contract. But there’s no need to bend every contract clause your way. A more balanced contract will be accepted sooner with fewer revisions. If you want to shift contract bias your way, be selective. For example:

• If the owner is in a hurry to take occupancy, pay close attention to bias when dealing with the construction schedule.
• If the plans aren’t as complete as you would like, consider bias very carefully when spelling out how the owner gets charged for extra work.
• If materials have to be ordered and paid for before work starts, require an initial payment that covers your up-front costs.

With Craftsman’s Construction Contract Writer, bend bias any way you want. Or draft a fair and balanced contract that offers a little extra protection when there's more risk. It's entirely your choice. The trial version is free.

Seven Ways to Avoid Surprises

Was there ever a construction project that went exactly as planned?

More often, you’re going to have a surprise, something unexpected – like a mistake in the plans or some site condition that requires extra work. Anything can go wrong on a job. And the result is nearly always the same – extra time and higher cost. No contractor is immune from surprises. But it’s easy to limit the damage when a surprise happens.

Contractors aren’t insurance companies. You shouldn’t have to make good at your own expense every time something goes wrong on a job. And you won’t with the right contract. Good contracts allocate risk between the owner and the contractor. Courts enforce contracts the way they’re written. If you write the contracts for your jobs, here are seven good ways to avoid losses from the unexpected.

Make your bid define the job. Describe the materials you plan to install, not the finished job. For example, if you’re replacing a roof, the bid might show "Remove and replace 18 squares of composition shingles and 80 linear feet of flashing.” If sheathing has to be replaced (a surprise), that’s at extra cost. Don’t quote a price simply to “re-roof with composition shingles.” That could be interpreted to include whatever sheathing is needed.

Exclude specific site conditions. Even the best site inspection isn’t going to uncover every potential surprise. Your contract should exclude mold, structural pests, hazmat, defective work by others, subsidence, unsuitable soil, rising water, zoning restrictions, setback requirements, HOA rules, severe weather and concealed obstructions such as water, power, waste, drain, communication and gas lines.

Exclude errors in the plans. Mistakes are common in plans and specs. Contractors aren’t licensed design professionals. You don’t have an obligation to find design flaws. Give notice when you spot a mistake. Then get an agreement on the cost of extra work.

Narrow interpretation of the plans. If the plans and specs don’t describe some detail or material, that detail or material is not part of the job. For example, a home plan that omits the roof is a plan to build a home without a roof.

Changes in the law. Anything extra required to conform to changes in law, code, ordinance or regulation is extra work to be done at extra cost.

Be prepared to prove the claim. Avoid disputes that begin “I said. . .” or “You said. . .” Keep a written record showing extra labor, material and equipment expense. Give the owner a copy as the extra work is being done.

Set the value of extra work. The contract should identify how charges for extra work will be calculated. The best choice is your “usual selling price.” The second best option is the cost of labor and materials plus your usual markup. Payment for extra work is due when that work is done.

Don’t take a loss every time there’s a surprise. Cover these seven points in your contracts. Using Construction Contract Writer makes that easy. The trial version is free.

Set the I-Codes Free

I’m old enough to remember when the building code was a slim little volume -- slipped easily into the back pocket of my overalls. Not true now. The code comes in over a dozen flavors, has thousands of pages and carries a price tag to match. The International Residential Code by itself is over $100, whether on paper or by subscription. That’s OK, I suppose. The International Code Council claims they publish the “highest quality codes.” Maybe so. But I have a problem with what happens next.

The ICC pushes to get their codes adopted as law in states and cities all across the US. That’s OK too, except for one point. The ICC requires a copyright notice on each code when adopted. In other words, the ICC claims to own the law. That would make the building code the only law I know that isn’t free on the Web. You have buy a copy of the code to know what the law requires.

It’s easy to see why the states, cities and counties adopt I-Codes. They’re buying good law on the cheap – a much better choice than drafting new law from scratch. And the ICC is eager to deal. Every adoption means more code books sold by the ICC store.

What’s Wrong with This Picture?

The ICC strikes a moral, altruistic pose. They’re protecting life and property. “People Helping People Build a Safer World.” Who can argue with that? But the ICC is also expert at protecting its turf. Consider the intense struggle the ICC had with the NFPA for dominance in code adoptions. More problems: The ICC is a tax-exempt non-profit organization. But over 5% of revenue goes to executive compensation. That's a lot for a non-profit, $4 million last year. I’ll leave that issue to the I.R.S. My complaint is that only code-enforcement officials sit on the ICC Board. No one on the Board speaks for the public. That makes the ICC revenue model an easy decision: The ICC writes the code. States adopt the code. The public has to buy the code.

When government grants a monopoly to private enterprise, regulation follows. In this case, states, cities and counties grant a monopoly by adopting an I-Code. But they exercise no influence I can see over ICC practice. Instead, state and municipal governments toe the line, reproducing the ICC copyright notice on each code adopted. Is that what government is supposed to do?

The U.S. Compendium of Copyright Office Practices answers that question for Federal purposes. “Edicts of government, such as judicial opinions, administrative rulings, legislative enactments, public ordinances, and similar official legal documents are not copyrightable for reasons of public policy.” Or, as Supreme Court Justice Stephen Breyer said, “if a law isn't public, it isn't a law.” Any regulation the Federal government doesn’t publish is void. So you won’t see I-Codes adopted by Federal agencies. The same public policy should apply to states and municipalities. But it doesn’t, at least in the opinion of the ICC. Fortunately, not every court agrees.

In Veeck v. Southern Bldg. Code Congress (2002), the 5th Circuit of the Court of Appeals rejected copyright claims over model building codes that were incorporated into Texas law. “[P]ublic ownership of the law means precisely that ‘the law’ is in the ‘public domain’ for whatever use the citizens choose to make of it.” So at least in the 5^th Circuit (Louisiana, Texas, Mississippi), a copyright notice on a model code adopted by government doesn’t mean much. Until the U.S. Supreme Court addresses the issue, status in other states is uncertain.

What to Do

If I-Codes truly make a safer world, adopted state versions should be readily available to anyone, the same as any other law. You can view current I-Codes at the ICC site (but without printing, copying and indexing features). Public.Resource.org offers a free download of state and municipal versions of the I-Codes. If you agree that our law shouldn’t belong to any private company, click the button at the bottom of the Public.Resource.org home page to make a donation.