Making Points with Call-Backs

You finished the job last week. This week you get a call from the owner:

The floor squeaks -- or a door or windows doesn’t close quite right -- or there’s a wet spot on the ceiling -- or a pipe in the basement is leaking.

If you’ve been in construction for a while, you could add more examples to my list. So what should you do when you get a call-back? I’ve got a suggestion -- a suggestion that could save both your reputation and some grief.

Most contractors take responsibility for obvious defects in materials and workmanship. That’s an easy choice. It’s the law in most states. It’s also what your clients expect. We live in an economy where vendors make refunds on merchandise that doesn’t live up to expectations. That’s simply good business. Contractors don’t have to make refunds. But they have the same obligation to meet expectations

Call-backs vs. Warranties

The essence of a call-back is that something isn’t working as expected. In that light, a call-back is an extension of the construction process. Many call-backs are items that could have been discovered with a more thorough final inspection.

The essence of a warranty claim is the right to collect money damages. That’s not where you want to be. Call-backs aren’t about money. The owner just wants your crew to check the problem and make it right. That’s perfectly reasonable. You did the work and probably know best what’s needed. Your cost of making repairs is likely much less than hiring another contractor to do the work. And there are other advantages. Doing the right thing earns the owner’s confidence. That builds your reputation. It’s also an opportunity to sell more work.

Set Limits in the Contract

But it’s reasonable to set limits. For example, you’re not liable for call-backs forever. The call-back period could be 30 days or 60 days. On a larger job, the call-back period could be the time between substantial completion (when you write the punch list) and final completion (when the punch list has been worked off).

If the first call-back doesn’t correct the problem, will you make a second call-back on the same problem? If so, does a new call-back period begin running after the second call-back?

Other generally accepted rules on call-backs:

• An owner who doesn’t give notice of a defect within the call-back period waives the right to repair or replacement.
• You have the right to test and inspect any claimed defect during the call-back period.
• You have the right to an opinion from an independent expert before beginning repairs.
• The call-back period starts early on any part of the work an owner occupies early.
• Exclude from call-back protection anything covered by a manufacturer’s warranty.

If your contracts don’t cover call-backs and specify reasonable call-back limits, you’ve set the stage for a serious dispute. The best way to protect yourself: Construction Contract Writer. The trial version is free.

Got Insurance?

Insurance is like a hard hat – a good choice on nearly any construction project. But many contractors don’t have full coverage. Let’s take a realistic look at a contractor’s insurance options.

We’re talking about two types of coverage; liability insurance and workers’ compensation insurance. Liability insurance protects the general public. If there’s a loss and if the contractor is at fault, the liability insurance carrier steps in. Workers’ comp covers employees injured on the job.

States set up three roadblocks to slow any contractor trying to operate without full coverage:

• Classification rules.
• Licensing laws.
• Contract disclosures.

 Classification: All states require workers’ compensation coverage for employees. But notice the word employees. Subcontractors are not employees. Just calling someone a sub rather than an employee doesn’t make it so. States and the IRS have rules on what makes someone a subcontractor rather than an employee. See my blog post for practical guidance. Misclassification can earn an employer fines and even a prison term. That’s what happened recently to the owners of Triple Star Roofing in Northwood, Ohio.

Triple Star had between 30 and 50 roofers working their jobs. Management considered all to be subcontractors. Most were paid weekly. Triple Star reported no employees. That saved Triple Star plenty on workers’ comp premiums. But it also exposed the owners to a five year prison term and a $10,000 fine for misclassifying employees.

Licensing: Where a contracting license is required, applicants usually have to show proof of insurance for both liability and workers’ comp. For example, Rhode Island requires liability coverage of at least $500,000. There’s no way around that. But a contractor who has no employees doesn’t need workers’ compensation insurance. That’s true in every state. I’ve seen estimates that 60% of all license applicants in California claim to have no employees.

Contract disclosures: Some states now require disclosure of both liability and workers’ comp coverage in contracts for residential work. Here’s a summary:

• California requires disclosure of the name of the carrier and the policy number on home improvement jobs.
• Florida – Miami-Dade County requires disclosure of insurance coverage in residential repair, remodeling and home improvement jobs.
• Idaho – Contracts for residential work have to disclose that the owner has the right to see proof of insurance coverage.
• Maine – The contract has to include a statement suggesting the owner ask the contractor about compensation and liability coverage.
• New Jersey – The contractor has to either confirm liability and compensation coverage or admit that no coverage exists.
• Oklahoma – Contracts that include roofing have to either confirm that workers are covered by compensation insurance or include a written statement advising that workers do not have coverage.
• Rhode Island – The contract has to disclose that the owner can demand a certificate of insurance before work begins.

What’s the penalty for failing to make required disclosures? In some states, the contract is unenforceable. In other states, it’s a violation of the state’s consumer protections laws. That can be a felony and may come with jail time.

No matter what you decide to do about insurance coverage, you’re better-protected with a professional-grade contract. Construction Contract Writer offers good options for both insured and uninsured contractors. The trial version is free.

Construction Warranty in 50 States

Warranty isn’t a popular topic with contractors. Warranty claims come in two sizes, expensive and even more expensive. Worse, no one wins a warranty dispute. And there’s almost nothing a contractor can do to avoid warranty claims. Better to cross your fingers and ignore the subject.

If that’s how you feel, keep reading. I’ll offer another viewpoint.

No too long ago I took a call from a contractor in a dispute with a condo association. The contractor had laid pavers around the perimeter of their complex. It was a big job and the condo Board was pleased – at first. About two years later the pavers started to “pump” where trash trucks made stops. The association claimed the pavers weren’t laid to spec. They hired an engineer and a lawyer and demanded that the entire job be torn out and done again –at the contractor’s expense. The job had passed every inspection, including soil density tests. But the original contract didn’t say anything about warranty. Obviously, the contractor needed help.

Warranties come in two flavors, express (written in the contract) and implied, either by court decisions or by statute (state law). All states enforce the terms of any express warranty in the contract. Most states also require that residential construction be done in a workmanlike manner. That’s an implied warranty. It’s not part of the contract and is separate from any written express warranty. The term and coverage of implied warranties will be whatever a court decides on a case-by-case basis or whatever state law requires.

Warranties State-by-State

Many states restrict or limit any attempt to disclaim the implied warranty of workmanlike construction, especially on residential jobs. For example, Kansas imposes a fine of up to $10,000 for trying to disclaim an implied warranty of fitness for purpose. Other states permit a contractor to disclaim implied warranties if wording, type size, and placement in the contract are just right.

Minnesota’s statutory warranty has to be written into every residential contract – three paragraphs of very precise language. The warranty runs for one year on materials and workmanship, two years on plumbing, electrical and HVAC and ten years on any "major construction defect".

California makes residential builders liable for a long list of construction defects. The builder has to either make repairs or compensate the owner for the loss – including relocation and storage expense. The warranty expires in either one, four or ten years unless another expiration period is in the contract.

Pennsylvania law implies a warranty of good workmanship -- what's reasonable under the circumstances, not perfection. An implied warranty of habitability is breached if a defect presents a “major impediment to habitation”.

New Jersey provides an express Home Owners Warranty (HOW) to all buyers of new homes. Every new home sold in New Jersey comes with a limited warranty against construction defects for up to ten years. Home builders in New Jersey are required to enroll in either the state warranty plan or a private warranty plan approved by the state.

Georgia’s Written Warranty Act requires that contractors deliver a written warranty before starting any residential work valued at over $2,500. 

Every residential job in both Florida and Texas comes with an implied warranty of good workmanship and habitability. But contractors in both states can disclaim all warranties if the contract leaves no doubt about what’s covered and what’s not.

In New York, the implied warranty requires that work be done with reasonable care and competence. Any attempt to disclaim that warranty is unlikely to work.

So what’s a contractor supposed to do?

My advice is to be pro-active. Don’t have your warranty dispute end up on some desk at two law firms. Write an express warranty into your contracts. Identify exactly what’s covered and what’s excluded. That would have saved my friend the paving contractor thousands. In his case, pavers were subsiding where water from yard sprinklers drained across the pavement. A written warranty excluding damage from standing water would have saved at truckload of grief.

Where do you look to find out what warranty your state requires? Where do you get good warranty agreements that protect contractors, no matter the type of project? I’m glad you asked. The best source I know is Construction Contract Writer. The trial version is free.

Allowances, Alternates and Unit Prices

Once a month or so I give a talk to a class of young men and women studying for careers in construction. I usually make a point that construction is a heavily regulated industry. That wasn't true 50 years ago. Today, government takes an interest in every construction project, from the moment the contract is signed through final inspection. You could probably cite a dozen examples. I’ll mention just one.

All states set standards for construction contracts, especially residential construction. And among residential jobs, home improvement gets the most scrutiny from government. A prime example: Six states prohibit time and material (“cost plus”) contracts for home improvement work:

·         California -- Business and Professions Code § 7159(d)(5).

·         Illinois -- Compiled Statutes Title 815, § 513/15

·         Massachusetts -- General Laws 142A, § 2(a)(5)ZZ

·         Nevada (residential pools only) -- Administrative Code § 624.6958-2(f)

·         Pennsylvania -- Statutes Title 73, § 517.7(a)(8)

·         Tennessee -- Code Annotated § 62-6-508(a)(5)

That doesn’t make sense to many of the students I counsel. Nearly every home improvement job includes a surprise, something you couldn’t anticipate. “How can I set an exact price before work even starts?” Good question. The answer: You don’t have to – if the contract includes allowances, alternates or unit prices. All three are perfectly legal, even where state law prohibits cost-plus contracts.

Allowances

It's common to leave the final decision on some part of the job to a later date. For example, at the time the contract is signed, the owner may not have picked out finishes such as flooring, appliances or fixtures. The actual cost won’t be known until the owner makes those decisions. So just include in the contract your best guess of the cost. That’s an “allowance.” If what the owner ends up selecting costs more or less than the allowed amount, the contract price adjusts automatically.

Alternates

Many contractors offer alternate quotes when bidding a job. For example, the basic quote might assume an interior wall is a partition and not load-bearing. The alternate might specify an additional cost if a support beam is required for code approval. What gets built and the cost depends on job requirements. Use alternate bids to protect yourself against surprises.

Unit Prices

When the exact scope of the job isn’t known at the outset, price work by the unit. For example, the amount of sheathing or flashing needed may not be known until the roofing tear-off is done. Fine. Write a specific quantity of sheathing and flashing into your contract. Then quote a price per square foot for either more or less than the specified quantity. The price of the job adjusts automatically as requirements change.

One thing has not changed in the last 50 years: If you know what you’re doing, you’ll find a way to get the job done. To see how allowances, alternates and unit pricing fit into your jobs, have a look at Construction Contract Writer. The trial version is free.

Changes for New Jersey Contractors

The New Jersey legislature has been busy since Super Storm Sandy put damage repair on page one of the news. Legislators in Trenton have introduced over a dozen bills designed to change the way New Jersey contractors make a living. Don’t expect any of these to make your life easier. Here are highlights:

S.B. 1769 would impose penalties for failure to complete work under a home improvement contract. Violation of the new law would require a refund of all money collected or treble damages plus legal fees. The bill would also require any applicant for registration as a home improvement contractor to disclose affiliated individuals who have a substantial interest in any other home improvement company. The bill is intended to end the common practice of collapsing a company that gets into legal trouble and then starting a new company. Introduced April 13, 2014.

S.B. 949 and A.B. 1546 would require that dry-out contractors register with the Division of Consumer Affairs, have liability insurance and use written contracts that comply with the Home Improvement Practices Act. Introduced January 27, 2014.

A.B. 4394 would require that contractors doing home elevation work meet experience requirements, register with the Division of Consumer Affairs as home elevation contractors, carry liability insurance and use written contracts that comply with the Home Improvement Practices Act. Last amended January 9, 2014.

A.B. 894 would allow an owner to waive the 3-day right to cancel a contract for emergency home improvement work. The contract has to include a specific waiver form and has to include a written estimate of the total cost and fees. If costs exceed the estimate, a written change order is required. Introduced January 9, 2014.

A.B. 1236 modifies warranties required under the New Jersey’s New Home Warranty program and requires arbitration of warranty issues by a state agency. Introduced January 16, 2014.

S.B. 1866 would allow both contractors and owners on home improvement jobs to sue in the county where the property is located. Current law requires that suit be brought in the county where a defendant resides. Introduced March 24, 2014.

Will these bills become law?

Almost certainly not all. But some will. And New Jersey is not alone. Bills that affect construction contractors are percolating through nearly every state legislature. If history is a guide, construction contract law will change in most states this year.

And the penalty for not complying? In some states, it’s a fine of several hundred to several thousand dollars. In states that license contractors, it’s suspension or loss of a license. In most states, the contract is void. You may have no right to collect the contract price. 

So how is a contractor supposed to know about changes in the law? That’s easy. Construction Contract Writer keeps your agreements legal, no matter where you work, no matter the type of job and no matter how the law changes. That’s one thing not likely to change.

Home Solicitation Sales

Have you ever bid a job without visiting the site?

Not likely. Nearly every bid should begin with a job walk. All construction contractors understand that. But here’s something you may not understand.

A contractor visiting the site before a residential contract is signed drops the job into a special legal category in nearly every state. Everywhere except Oregon, a job walk makes the deal a home solicitation sale. State law requires that the contract include specific notices. Omit any required notice and heavy penalties apply. For example, in most states, the owner can cancel the deal and demand a full refund. In other states, omitting a required notice is considered consumer fraud. That’s not where any contractor wants to be.

Even if you’re not cited for consumer fraud, there are good reasons to have a perfectly legal contract. If there’s a dispute, the owner’s attorney will scour your agreement for anything that isn’t strictly legal. Omitting a notice required by state law gives the owner extra negotiating leverage. You’ll probably have to make concessions to collect the final payment.

Please don’t misunderstand. There’s a place for home solicitation sales acts. They’re consumer protection law. But the way I see it, a contractor doing a job walk doesn’t belong in the same category with door-to-door sales people. It’s simply not possible to do home improvement without a visit to the construction site. Still, the law is the law. Until the law changes, every conrtactor has to comply. Fortunately, it’s easy. More on that shortly.

What the States Require

As mentioned, every state except Oregon has either a Door-To-Door Sales Act or a Home Solicitation Sales Act. Every act is different. But all require a special written notice – usually a statement that the owner has three days to cancel the deal. The notice has to explain how an owner can cancel and has to set a deadline for making a refund.

A notice like that probably sounds familiar. The same terms appear in the federal 3-day right of rescission (Reg Z) notice required any time you do work on the primary residence of an owner. So if state and federal notices are essentially the same, are both notices required? Very good question. In some states the answer is “yes.” In other states, the answer is “no.”

Twenty-two states and the District of Columbia currently require both state and federal rescission notices: AK, AR, AZ, CT, DC, FL, GA, HI, IN, KY, MI, MO, MS, ND, NH, NJ, NY, OK, VT, WA, WI, WV, WY. In the remaining states, the federal Reg Z notice is enough.

But there are loopholes in the law. For example, big-box retailers are usually exempted. In some states, a notice isn’t required if the contract is signed at the seller’s place of business or if the contractor is invited to the construction site. But in most states, a job walk permanently taints the transaction as a home solicitation sale.

Now, about the easy way to comply precisely with the law in your state. It’s called Construction Contract Writer. The trial download is free.

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.