Construction Contracting After COVID-19

I’m a lawyer, not a doctor. Neither am I an economist. So, I’m not going to offer medical advice. And I’m not going to make any prediction about when the economy will recover. But this is clear to me. Post COVID-19, changes are coming. No industry is exempt, certainly not construction contracting.

I’ve witnessed four complete business cycles during my productive lifetime. These were the good years for contractors:

• 1975 to 1978 -- recovery after the Viet Nam war
• 1982 to 1984 – recovery from the recession of 1982
• 1990 to 2005 – the longest expansion in US history
• 2010 to 2020 – recovery from the Great Recession

And there were bad years: 1974, 1981, 1989, 2009. Each of these coincided with an economic recession. Employment in the construction industry dropped by 10% or more. Typically, residential construction was the hardest hit.

What Happens Next?

Economists agree we’re on the threshold of another recession. If history is a guide, construction activity will be down for at least several quarters. Hardest hit: discretionary work like home improvement. Casualty loss work is different. It comes and goes with the seasons and tends to be local. But it’s a good option for residential contractors with the patience and the administrative skills to deal with adjusted losses.

Expect labor and material price changes. Material shortages are likely as industry adapts to changes in work requirements. To see what I mean, walk in any supermarket. Some shelves are bare. Promotions and discounts are largely gone. Any retailer that’s open can sell anything in stock. No need to cut prices. Building material dealers may face the same uncertainty in the coming months.

Over the last decade, construction costs (labor, material and equipment) increased barely 2% a year. That’s not typical. If you aren’t old enough to remember the 1970s, then you don’t remember when construction costs jumped 1% or more a month. Inflation back then was driven by record deficits that financed the Viet Nam war. Expect the debt bomb of 2020 to put similar pressure on construction costs well into the next decade.

Protect Yourself

In uncertain times, you need contracts that anticipate problems. For example:

Supply of labor and materials. Think about the imported materials on your jobs. How much comes from abroad? Lumber, cement, nails, wallboard, electrical and mechanical parts, plumbing fixtures, appliances, tools? If the US de-couples from supply chains that extend back to China, many of these materials may be in short supply for at least a while.

Cost inflation. There’s risk in any job that lasts more than a few months. For example, if the job won’t be finished for six months or more and costs are increasing 1% a month, most of your profit margin could be drained away by higher prices.

Plan for material shortages and price changes. You’re not an insurance company. You shouldn’t have to absorb all the losses. Write contracts that:

• Allow substitution of materials when necessary to meet job requirements.
• Pass higher costs to the owner when prices increase before work is done.

How do you do that? Easy! Construction Contract Writer offers all the options. Just click a box to protect your company and your bottom line.

Construction Contracting in the Age of COVID-19

As of this writing, governors of five states have issued “stay at home” orders. How many more states will do the same is anyone's guess. So far, each of these orders is different.  But all prohibit going to work – except for essential services. On that basis, nearly all construction jobs in these states will stop. What should you do? Who pays? At what cost?

This isn’t simple, as I’ll explain.

The obvious issue is project completion dates. Sixteen states (AZ, CA, CT, DC, HI, IN, MA, MD, ME, ND, NV, NY, PA, TN, VA, VT) require a scheduled completion date on residential construction contracts. Any schedule is out the window when a job is shut down by a pandemic. I’m going to assume that courts and license boards in these sixteen states will do the intelligent thing – extend contract completion dates by at least the duration of the shutdown.

Two states take a different approach.

• West Virginia § 142-5-3.1.2 requires either a completion date or a statement that there is no estimated completion date in home improvement contracts. If the contract has a completion date, West Virginia § 142-5-3.1.12 excuses late completion if delay is beyond control of the contractor. Obvious example: a government-mandated shutdown.
• New York General Business Law § 771 requires that home construction, improvement and repair contracts state whether time is of the essence. That can be poison, as I explained in January. When time is of the essence, most courts will consider any delay in completion to be a breach of contract. There is no excuse.

No state requires a completion date in commercial construction contracts or subcontracts. But many public works and commercial contracts include a completion date – with charges assessed for delay. These same agreements usually include a force majeure clause to extend the completion date for exceptionally bad weather, war, strikes, lockouts, etc. A good force majeure clause requires an executed change order for any delay beyond control of the contractor. Examples: pandemic or a government shutdown.

Who Pays?

Shutdowns are expensive. Your crews are out of work and may not be available for recall. The site and materials have to be secured. Labor and material costs may be higher when work resumes. Meanwhile, overhead expense goes on as usual:

• Direct overhead -- temporary utilities, supervision, equipment, some insurance
• Indirect overhead -- general management, estimating, selling, accounting, bookkeeping, business licenses, taxes, professional and clerical fees.

Is it reasonable that a contractor cover all these costs? Or is government-mandated delay extra work for which extra pay is required? A pandemic isn't the fault of anyone. Common sense requires sharing the burden of government shutdown between owner and contractor.

My advice

If your job is shut down by government order, notify the owner immediately – in writing:

• Work is suspended. You’ll do what you can to preserve and protect the job site.
• Suspension by government order is excusable delay for which you are not responsible.
• Pledge to resume work when the order is lifted.
• Cite costs that will increase during any protracted delay.

Include with your notice a draft change order for signature by the owner:

• Amend the completion date. For each day of suspension, the completion date should be moved back 1.3 calendar days.
• Make it clear that government delay is extra work for which you are entitled to extra compensation.

Protect yourself on all future jobs. Work under contracts that:

• Require the owner to execute a change order for excusable delay. 
• Make it clear that government-mandated shutdowns are excusable delay.
• Require reimbursement for both inflated costs and higher overhead expense after an excusable delay.

Want to see how good contracts protect your business in times like these? Construction Contract Writer does all this right now. Have a look at the navigator section Delay Claims. The trial version is free.

Questions for HomeAdvisor

If you do any residential work, you know the name. HomeAdvisor is a Web directory of local contractors. The idea behind HomeAdvisor is simple. Read what your neighbors say about contractors they know. Then get a quote from the contractor of your choice.

HomeAdvisor traces its roots back to Angie’s List. In 1995, Angie Hicks went door-to-door in Columbus, Ohio, signing up anyone who wanted to see her list of recommended contractors. In the first year, Angie got over 1,000 owners to pay a fee and sign-up. A business was born.

Soon Angie met a venture capitalist with access to millions in investor funds. You may not have heard of ServiceMagic, or Instapro, or MyHammer or HomeStars, or MyBuilder, or Handy. All offer an on-line list of contractors. And all are now part of HomeAdvisor -- listed on the NASDAQ as ANGI Homeservices, Inc.

Make no mistake, pairing up customers and contractors is big business. Home Advisor claims millions of subscribers (owners), more millions of paid members (contractors), $1.326 billion in annual revenue and ‎4,500 employees. Headquarters are in Denver, Colorado.

Those 4,500 employees are why you’ve heard of HomeAdvisor. When H-A discovers you do home improvement work, your business goes on their call list. Expect multiple calls from HomeAdvisor sales reps until you buy in.

With all that revenue from contractors, HomeAdvisor elected to turn their directory into a freemium service. Since 2016, any owner can scan the list of contractors and check the reviews. No cost. But contractors had to pay to get listed. And it’s not cheap. Annual charge is several hundred dollars plus a fee of $25 to $75 per lead. Contractors report paying $1,000 a month or more for the listing. Money well spent? Click here to read contractor comments. 

Worse Still

Until recently, HomeAdvisor only matched contractors with owners. The owner and the contractor had to strike a deal. Now H-A offers another option, “upfront” pricing:

• H-A quotes a fixed price for the work without ever seeing the job.
• H-A selects the tradesperson to do the work.
• H-A collects in full before anyone arrives on site.

Obviously, H-A has to limit these “upfront” jobs to small, simple tasks, like cabinet repair, patching walls or ceilings, replacing a plumbing or electric fixture or re-glazing a window.

If you’ve dipped into this blog any time in the last ten years, you’ll recognize some issues with H-A’s new “upfront” business model:

• H-A won’t reveal the names or numbers of tradespeople sent to do the work. There’s no way to check references or license status. Is that a little weird from a company built on contractor references?
• Any agreement to do construction work at a set price is a construction contract. Every state regulates home improvement contracts. Most states limit the initial payment and require written contracts with plenty of notices and disclosures. Where is the H-A written contract?
• Any time a tradesperson makes improvements to an owner’s primary residence, law in every state gives that tradesperson a construction lien. When work will result in a lien on an owner’s primary residence, federal law requires delivery of a Reg-Z notice – in duplicate. Where’s the three-day right to cancel?

In short, HomeAdvisor’s new “upfront” model ignores state law, violates federal regulations and defies common sense. Home Depot and Lowes don’t make mistakes like that. Installation services from both come with contracts that comply perfectly with both state and federal law.

My question: How long can a publicly-traded company like HomeAdvisor skate around state and federal law?

If you’re serious about staying legal, no matter the state or type of work, have a look at Construction Contract Writer. The trial version is free.

Use T-I-L to Close More Deals

Most contractors want to get paid when the job is done. That’s human nature. But it may not be the best way to do business. Ask any car dealer what would happen if every buyer had to pay cash on delivery. Sales would tank. Credit can create sales opportunities you didn’t know existed.

Some of the most successful builders offer a credit term -- monthly payments after the job is done. If you’re in a position to defer part of the income from completed jobs, consider making credit part of your sales pitch.

It's perfectly legal to take an IOU for part of the job or stretch out payments after work is done. But a construction contract with a deferred payment term has to include disclosures required by the Federal Truth in Lending Act (T-I-L). Banks, car dealers and finance companies are good at writing agreements with all the required disclosures. It’s at the heart of their business. But any construction contractor can do the same thing. And Construction Contract Writer makes it easy.

This is one area where home repair and improvement specialists have an advantage over custom home builders. I don’t know any new home builder that offers to finance what they build. But it’s a natural for repair and remodeling contractors to offer extended payment terms, especially when that helps close the deal.

All the Details

The Financing Calculator in Construction Contract Writer does all the T-I-L math. Enter into the calculator what you know: the bid price, the down payment, other charges and credits, the proposed interest rate, the number of payments. Those are easy. CCW's financing calculator does the heavy lifting -- figuring the amount financed, the finance charge, the APR, monthly payments, etc. -- and inserts those numbers into your construction contract. All disclosures required by T-I-L are automatic.

Even if you don’t plan to offer credit on a job, T-I-L disclosures have to be in the construction contract any time you recommend a lender – even if the lender makes all T-I-L disclosures in the loan docs. If you’re in the habit of recommending a lender to clients, the finance calculator in Construction Contract Writer should be part of your tool kit. Fail to make the required disclosures and you’re liable for both the overcharges and your client’s attorney fees. You don’t need that.

One other point: CCW doesn’t write the loan docs. You’ll still need the IOU. But all T-I-L disclosures and payment terms are laid out precisely in the construction contract. Just copy and paste from your CCW contract to the loan papers.

The trial version of Construction Contract Writer is free. If you can use CCW to close more deals, the full working version is $119.

When is Time of the Essence?

Question: “My client wants a completion deadline written into our construction contract. What should I do?”

My advice: Avoid committing to a firm completion date. Instead, lay out a proposed schedule – beginning date, milestones, completion estimate. Explain the contingencies you can’t control: weather, permits, inspections, changes, labor and material shortages, conflicts between trades, etc. Be blunt: Anything can be done either good or cheap or fast – but not all three. Don’t concede to unreasonable expectations.

Many states require beginning and completion dates in home improvement contracts. Courts usually consider these to be estimates, not firm deadlines. Writing “time is of the essence” into your contract is entirely different. If those words are in your agreement, missing a deadline gives an owner the right to bail out of the deal – or maybe worse. A Connecticut case decided last month illustrates the point.

Janet Lazzaro wanted her home on Casement Street in Darien, CT demolished and rebuilt. She had WBG Holdings prepare the plans and accepted their bid of $471,000.00 to do the work. That was in December 2016. Page one of their agreement made “time of the essence.” Work was to be completed within seven months after the start of demolition.

WGB had the good sense to write contingencies into the schedule. Delay due to a host of conditions (weather, acts of god, fire, flood etc.) would extend the completion date. Janet paid WGB $7,000.00 in December 2016 and another $52,000.00 in January 2017.

Demolition began March 10, 2017 and continued for the rest of the month. Work was delayed by winter storms, late winter and spring rain which required pumping out the site, muddy ground, extra engineering and drainage requirements, equipment breakdown, delays in permitting, inspection and site requirements imposed by town officials. (Does any of this sound familiar?) Nearly eight months after the contract was signed, WGB still didn’t have a permit to begin construction. On October 18, 2017, seven months after demolition started, the Town of Darien granted a permit for foundation work. Janet terminated the contract the same day and hired another contractor.

But WGB still wasn’t done with the Lazzaro job. Janet filed suit, claiming:

• A partial refund on the $85,000 paid to the date of termination.
• The extra $116,400 she had to pay another contractor to finish what WGB started.
• Lost rental income, real estate taxes, bank charges, mortgage interest and living expense caused by missing the completion date.
• Recovery of attorney fees for violation of Connecticut’s New Home Construction Contractors Act.
• Compensation for breach of the common-law covenant of good faith and fair dealing.

The Court’s Judgment

WGB did some things right. For example, WGB kept a job log that documented reasons for delay. Still, making time of the essence was plainly a mistake. Judge Sommer ruled those words gave plaintiff a right to terminate the agreement and hire another contractor. That contractor offered testimony at the trial: In his opinion, both Janel Lazzaro and WGB “significantly underestimated both the cost of the project and the time required to complete it.” The actual cost of construction was $587,400. Duration from breaking ground to certificate of occupancy was 13 months.

Judge Sommer awarded Lazzaro only $33,840 plus costs and attorney fees. Of that, WGB admitted $32,000 was due as a refund. Lazzaro v. Deverin, December 6, 2019

If you have a client who insist on a hard deadline for completion, have a look at Construction Contract Writer. Discover how easy it is to protect against unreasonable expectations.

Construction Management Contracting in Montana

Dr. Gary Jystad practiced family medicine and surgery for over 50 years in Montana. In 1991, he built a log home on Flathead Lake in Rollins, MT, the “dream home” of his wife Mary Ellen. A tragic fire in 2016 devastated the main building, leaving the garage and guest house damaged but not destroyed.

In February 2017, Dr. Jystad signed a contract with Flathead Management Partners (FMP) to oversee reconstruction. FMP agreed to “coordinate and facilitate” remediation and “work at the exclusive direction of Dr. Jystad”. FMP didn’t plan to do any work with FMP crews.

Under the contract, FMP would:

• Assist Dr. Jystad in selecting an appropriate design,
• Select and contract with a general contractor to execute that work,
• Supervise & coordinate the work and logistics of designers, contractors, vendors, permits and . . . all else necessary to complete the agreed upon scope of work in a timely manner and within an agreed upon budget.

If you’ve been in construction for a while, you probably recognize this as a fixed-price construction management (CM) contract.

Work got off to a good start. FMP and Dr. Jystad worked well together. FMP pulled the permits and helped Dr. Jystad select a general contractor. Work started on the main house. But on June 10, 2017 there was a falling out. Dr. Jystad, his son Robert and his daughter Sharon met with FMP. The meeting didn’t go well. At the end of the conference, FMP was told that their contract was "null and void and terminated." That didn’t set well with FMP. They stopped work and filed a construction lien. Later FMP filed suit against Dr. Jystad, asking foreclosure of their lien and claiming damages for breach of contract.

To his point, it was a simple contract dispute. When an owner breaches an agreement, the contractor is entitled to damages, usually loss of profit. In this case, FMP claimed those profits would have been $191,876. And that was the award of the trial court.

In the Montana Supreme Court

Dr. Jystad’s appeal made a simple point. The contract with FMP was not enforceable under Montana Code § 28-2-2201. Since April of 2009, Montana contracts for construction of a new residence “between a general contractor and an owner” have to disclose in writing:

• The contractor’s liability and workers’ comp coverage,
• The billing cycle and payment schedule,
• How change orders will be handled,
• A schedule of inspections and tests,
• That the owner can pay for other tests and inspections;
• The general contractor’s one-year warranty.

FMP’s contract covered none of this. And the Montana Supreme Court has already ruled that an oral contract for construction of a new home that lacked these disclosures was void under § 28-2-2201.

You Decide

Was FMP a general contractor under Montana law? If so, FMP’s award of $191,876 gets wiped out.

Before you decide, consider this. Several states have wrestled with this issue: Is a construction management contractor like FMP a “construction contractor” under state law? Or was FMP just a consultant?

This isn’t a trivial issue. There’s plenty at stake here. Construction management contracting (consulting) is now big business, and for good reason. Most states require that general contractors be either registered or licensed. Consultants need only a business license.

Two states have weighed in on this issue:

Since January 2014, California Business & Professions Code § 7026.1 has made it clear. Anyone who bids construction work or manages construction projects is a “contractor” and has to be licensed.

Just last week, a Louisiana appellate court decided that a “job coordinator” on a residential project was required to meet warranty standards imposed on general contractors in Louisiana. (Palermo v. Homes & More, Inc.)

Expect other states to resolve this issue in the next few years. My guess is that nearly all states will decide that CM consultants are “general contractors” and carry all the burdens and benefits that go with the title.

So, what did the Montana Supreme Court decide? Under Montana law, a construction management contractor is not a “general contractor” and doesn’t have to comply with § 28-2-2201. FMP gets to keep their $191,876. (Flathead Management Partners v. Jystad, decided December 17, 2019).

My advice: Don’t expect the FMP v. Jystad decision to stand for very long. It opens a gaping loophole in Montana construction contracting law. The Montana legislature is likely to consider a change to § 28-2-2201 at the next session. To be safe, give the notices required of construction contractors, even if all you do is consulting. Staying legal is quick and easy with Montana Construction Contract Writer. The trial version is free.

If you’re new to construction management contracting, Paper Contracting by Mitchell & Moselle is the best hands-on guide available.

Construction Law Changes in New York and Texas

If you work in either New York or Texas, keep reading. Changes in the law are going to affect how you do business.

First, New York

As I write these words (November 23, 2019), New York Governor Andrew Cuomo is about to sign S.B. 1405, the “storm chaser” bill. There’s no organized opposition to the bill. So, you can assume the bill will go into effect by June 2020.

What’s in the new law? Roofing, siding and waterproofing contracts have to be in writing and must show the name of the roofer’s liability and worker’s comp carriers. Policy limits are $100,000/$300,000 for liability and either workers’ comp coverage or a Certificate of Exemption from the Workers' Comp Board.

No payment on the contract is allowed until materials are on site.

For insured losses:

• Roofing contractors can’t offer to cover any portion of the deductible.
• The owner has three business days to cancel the contract after being informed that any part of the loss is not covered by insurance.
• Emergency work is exempted if the owner furnishes a dated and signed hand-written statement of the emergency and waives the right to cancel.
• Roofers aren’t allowed to negotiate settlement of claims or receive a fee for referral to a claims negotiator.

Failure to comply with this new law bars suit on the contract.

Now to Texas

The new law is similar in some respects to the New York law but covers all insured losses, not just residential roofing. Business and Commerce Code § 2702 became effective September 1, 2019.

Any repair job for $1,000 or more that’s covered at least in part by insurance has to a include a detailed notice in 12-point type:

Texas law requires a person insured under a property insurance policy to pay any deductible applicable to a claim made under the policy. It is a violation of Texas law for a seller of goods or services who reasonably expects to be paid wholly or partly from the proceeds of a property insurance claim to knowingly allow the insured person to fail to pay, or assist the insured person’s failure to pay, the applicable insurance deductible.

It's a Class B misdemeanor (six months in jail) to either (1) omit the contract notice or (2) offer to reimburse the owner’s deductible.

20 States

With the addition of New York and Texas, 20 states now place some form of restriction on contracts for insurance repair work: AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI and WV. The laws are technical and change every year. No matter the type of work or where you build, Construction Contract Writer will draft letter-perfect contracts that comply exactly with the law in your state. The trial version is free.