Collecting Final Payment

Every construction project ends with a walk-through – at least it should. Too often, final inspection is the start of something else, such as a legal battle. The owner isn’t going to let the contractor skip out with work yet to finish. The contractor wants payment for work completed.

Here are a few good ways to get past confrontation when the job is nearly done.

Courts recognize an obligation to pay when any construction project is substantially complete. Even if a few items aren’t finished, the owner should pay what’s due less the cost of wrapping up defects. So, when is a job substantially complete?

Occupancy is the best evidence of substantial completion. If the job has passed final code inspection and the owner is moving in, the job is substantially complete. That’s the easy case. Some cases aren’t so clear cut.

Substantial completion doesn’t have to be an all or nothing affair. If the job includes distinct parts, one part could be substantially complete while the other isn’t. In exchange for payment, offer to note what’s accepted and what’s rejected. For example, suggest that the owner exclude some portion of the job (such as appliances or fixtures) from acknowledgement of completion.

Partial completion can be a problem when some equipment serves several parts of the project – some complete and some incomplete. HVAC and electrical systems are obvious examples. By convention, payment is due on any equipment that serves a part of the project that’s complete even if that equipment also serves an incomplete part of the job.

If the owner is eager to take up occupancy, offer to have incomplete work handled as warranty repair to be done later. That’s clearly the best choice when defective equipment is covered by a manufacturer’s warranty.

Your Punch List

Before starting the walk-through, hand the owner a punch list of known issues. By implication, the job will be substantially complete when an owner approves your list. Your punch list should show:

• Each defect. To make corrections easy to find, walk the project with a roll of blue painter’s tape. Stick a short piece of tape on each defect. Write a pencil number on the tape, the same defect number as on your punch list.
• What’s needed to complete the work.
• The subcontractor or trade responsible.
• Your estimate of when work will be finished for each item.
• The estimated cost to complete or correct each defect. Use these estimates to figure how much of the final payment can be withheld, usually 125% of your estimated cost.

If the owner approves your punch list, the next steps are easy.

• Final payment is due, less the estimates on your punch list.
• Later inspections will be limited to items on your list. Everything else is accepted.
• Roles change. The owner can enter and use the site at any time. The contractor loses the right to enter the property at will.
• Get punch list items worked off in a week or two. The longer work drags on, the more time an owner has to accumulate grievances.

A good contract can make project close-out almost automatic. Have a look at Construction Contract Writer. The trial version is free.

Home Improvement California Style

Anna-Becky Redlich needed some work done on the bedroom, sitting room, closet and bathroom of her Hillsborough, California home. Nothing structural. The only changes would be cosmetic. Reliance Management Group offered to do the work on a cost-plus basis. The estimated initial contract price was $250,000. The down payment would be $1,000 plus a "retainer" of 10%.

If you’ve done any home improvement work in California, you probably see a problem already. California home improvement contracts have to show the cost of work in dollars and cents. Cost-plus-fee (time and material) contracts for home improvement work are legal only if there’s a guaranteed maximum price (GMP). OK. Reliance had that covered. As recited in the contract, the GMP was $5 million.

Second problem: The 10% “retainer” came to $25,000. California limits initial payments to $1,000.

These issues aside, Anna-Becky signed the contract. During construction, six written change orders added $160,000 to the job. Eventually, work was completed to Anna-Becky’s satisfaction -- at a total cost of $459,000. If that seems a little high for a bathroom remodel, there’s something else to understand about this job.

Reliance’s manager on the Redlich job was Paul Burton. According to Judge Banke, Burton and Anna-Becky “became personally and romantically involved”. Another issue: According to Judge Banke, Burton was taking large cash kickbacks from subs, rigging the bidding process to favor specific contractors.

In the end, Anna-Becky wasn’t happy. She wanted her money back, $459,000 to be exact. To drive the point home, Anna-Becky’s legal counsel pulled out all the stops.

1. The contract was void.
2. Reliance didn’t have worker's compensation coverage.
3. Reliance didn’t have a "responsible managing employee or officer" on the job.

In short, Anna-Becky was entitled to a refund.

At Trial

The court disposed of the second and third points with little effort. Facts simply didn’t support either claim. The first point presented a more difficult issue for the court. True, Anna-Becky’s contract was "void, and unenforceable." Did that entitle her to recover the full amount paid without any offset for the value of work done?

In the court’s words, “the public importance of discouraging prohibited transactions outweighs equitable considerations of possible injustice between the parties”. In other words, contractors who draft bad agreements are on their own. But the court refused to order a full refund, awarding Anna-Becky only $40,689.68, including $25,000 for the overcharge on initial payment. Redlich v. Reliance Mgmt. Grp. (June 9, 2021).

Take-away from this case: Write a bad contract and you’re on your own. Don’t expect any help enforcing a bum contract if the job turns bad. Apparently, Reliance learned their lesson. Counsel for Reliance stipulated their client would never again use the Redlich contract form.

Word to the Wise

All residential contracts have to meet standards set by state and federal law. It’s easy to draft a perfectly legal construction contract in any state and for nearly any job. Get Construction Contract Writer. The trial version is free.

 

Breach of Contract in Pennsylvania

Neal Navitsky bought a lot on Plum Run Road in New Oxford, PA, and started planning his new home. William A. Mcintyre & Sons, LLC, agreed to build a 4-bedroom, 2.5 bath, 2,843 SF home on the site for $290,521. Under the contract, signed change orders were required for any work not in the agreement. Navitsky and his bank set up a draw schedule for the job and work started.

During construction, Navitsky asked for three changes. Mcintyre quoted a price of $9,375 for the changes, wrote up change order forms and did the extra work. Navitsky accepted the written change orders but didn’t sign or return any of the forms. Why not? Because Navitsky had a complaint. He figured work done on the house so far was worth far less than the $159,786 McIntyre had already been paid. Navitsky wanted to negotiate change orders when the home was complete

To keep the project moving, Mcintyre did the extra work even before change orders were signed. Mcintyre figured getting signed change orders from Navitsky was only a formality. But when reminded about the un-signed orders, Navitsky refused to sign or pay for the extra work. Mcintyre demanded payment.

Navitsky knew how to handle that. He directed his lender to pay the $41,318 fourth draw to himself, Navitsky, rather than his contractor.

Owed over $50,000, with no prospect of getting paid, Mcintyre pulled off the job and filed suit.

Now What?

Any time a construction project runs off the rails, the contract comes front and center.

• Is the contract legal in every respect?
• If so, what does the contract require?
• Was there a material breach of contract?
• If so, who was the first to commit that breach?

The court had no trouble finding a valid contract. But did the contract require that Navitsky sign change orders and pay when each change was complete? The court didn’t find anything in the contract on that. But every contract requires good faith and fair dealing. In the court’s opinion, “Navitsky’s conduct did not comport with this obligation.” Navitsky should have signed the change orders and paid for changes when done. But was that failure by itself a material breach of contract?

A material breach by one party to a contract entitles the non-breaching party to suspend performance. Who breached first is important. Breach by Mcintyre would void the agreement, leaving the contractor with no profit on the job.

Was failure to sign change orders a material breach of contract that gave Mcintyre a right to stop work? Or did McIntyre breach the contract by demanding payment for changes before doing more work?

In the court’s opinion, Mcintyre’s demand for payment on changes was not material breach of contract. Navitsky was told that work would resume when Mcintyre received payment for the changes. I agree with the court. Any contractor can delay work when payments are late.

But refusing to pay for changes and diverting the fourth draw to himself were material breach by Navitsky. The court awarded Mcintyre $50,693, a judgment affirmed last week by the Superior Court of Pennsylvania.

A Final Point

With the right contract, Mcintyre would have saved two years of litigation. Good construction contracts require payment for changes when each change is complete. It’s easy to draft nothing but good construction contracts. Get Construction Contract Writer. The trial version is free.

 

Three-day Notice in Virginia

The HVAC system in Elise Theyer’s historic Norfolk, Virginia home needed an update. Elise saw an ad for ductless mini split systems and called Norfolk Air Heating and Cooling to get a bid. Norfolk Air made a sales call. They quoted a ducted system on the first floor and six mini-splits on the second floor. Elise signed their agreement on November 21, 2017.

So far, so good. But as I’ve said many times: “When the job goes bad, you better have a good contract.” In Elise’s case, Norfolk Air didn’t. Their quote omitted the notice of a buyer’s right to cancel, as required by Virginia’s Home Solicitation Sales Act (HSSA).

Problems started when Elise wasn’t satisfied with her new HVAC system. Norfolk Air did what they could to make repairs. After several attempts, Elise gave up, called another contractor and filed suit against Norfolk Air.

The question for the court: Was Norfolk Air’s sales call on Elise a “home solicitation sale” as defined by Virginia law? If it was, omitting the cancellation notice gave Elise the right to collect damages and attorney fees from Norfolk Air.

A little history: Starting in the 1950s, most states adopted home solicitation sales acts. The intent was to curb abuses common in door-to-door sales. Contracts had to include a notice of the owner’s 3-day right to cancel. Any home solicitation contract that omitted the 3-day notice could not be enforced in court. Worse, consumer protection laws labeled violating the HSSA “consumer fraud” and imposed appropriate penalties.

If you’ve worked in home improvement contracting for a while, you’re sure to see a problem here. Every home repair or improvement job requires a visit to the site. Is every one of those a “home solicitation” sale?

You Decide

Did omitting the 3-day notice give Elise the right to collect damages and attorney fees?

Many states exempt specific transactions from their home solicitation sales acts. For example, several states have what I call the “big box” exception: If the contract is signed at the place of business of the vendor, even if after an on-site visit, then it isn’t a home solicitation sale.

Virginia’s HSSA exempts sales made at the buyer's residence after "prior negotiations" elsewhere, such as at a trade show or at the vendor’s store. But there weren’t any prior negotiations in this case. Elise simply called Norfolk Air and asked for a quote.

Other states exempt from their HSSA any sales calls made after an invitation from the owner. For example, Mississippi’s HSSA excludes sales made at the owner’s home if the vendor was invited on site. By court decision, Michigan has adopted a similar exception to their HSSA.

Virginia law has no such exception. Every sales call at a residence that results in a sale must include an express notice of the buyer's right to cancel. Va. Code § 59.1-21.3(1).

What the Virginia Court Decided

Fortunately for Norfolk Air, Virginia’s Attorney General has a written opinion on point. According to the AG, it’s not a home solicitation sale if, for example, an owner calls a plumber, gets a quote on the spot and has the plumber do the work. Virginia’s HSSA is not "intended to apply to sales that are initiated by the buyer and that are conducted in the home . . .” In the case of Theuer v. Norfolk Air Heating & Cooling, Inc., the court adopted the AG's logic. 

Would the same rule apply if the work were installing a new roof or remodeling a bathroom? In my opinion, that would be a stretch. Black letter law: There’s risk in omitting any contract notice required by law in your state.

So what’s a contractor to do? My answer is simple. Write bullet-proof contracts. That’s easy with Construction Contract Writer, no matter the site, no matter the type of work. The trial version is free.

Indiana Insurance Contract

A severe spring storm damaged the home of Jason Jenkins in Boone County, Indiana. On June 11, 2017, Jenkins agreed to have Mcgraw Property Solutions make repairs. Mcgraw promised to complete all storm remediation work for the price approved by Jenkins' insurer. The contract provided that "[i]f the insurance company does not approve your claim, this agreement automatically terminates." The contract also required Jenkins to pay Mcgraw 20% of the replacement cost as liquidated damages if Jenkins refused to allow Mcgraw to finish the work.

After the contract was signed, Mcgraw did a nine-page scope of loss estimate, setting the repair cost at $170,559.63. A month later, Jenkins' insurer approved the claim, but only for $109,371.97. Jenkins got a check for $64,597.37. Obviously, this wasn’t working the way Jenkins had hoped. 

Before work started, Jenkins decided to sell out, take the insurance money and move to Florida. That left Mcgraw out in the cold. Mcgraw wanted to either do the work at the agreed price or collect from Jenkins for breach of contract

Jenkins checked over the June 11 contract and found some problems. It didn’t comply with Indiana’s Home Improvement Contracts Act (HICA):

• The starting and completion dates were listed as “TBD”.
• There was no notice of the 3-day right to cancel on insurance jobs.
• There was no written signature by Mcgraw.
• The signature date was missing.

The Replacement Cure Contract

Jenkins wanted out of the deal with Mcgraw. But the 3-day right to cancel had expired long ago. So Jenkins demanded that Mcgraw submit a corrected contract. On August 24, Mcgraw wrote up a new agreement – but relating back to the June 11, 2017 agreement. This new contract included the Indiana cancellation notice that should have been in the original agreement:

You may cancel this contract at any time before midnight on the third business day after:

• (A) The date of this Agreement.
• (B) You have received written notification from your insurance company that all or any part of the claim or contract is not a covered loss under the insurance policy.

Jenkins accepted the replacement cure contract on August 27, 2017 – and on the same day sent Mcgraw a notice of cancellation. That didn’t end it. Mcgraw filed suit for breach of contract.

You Decide

The original June 11 contract was defective. Everyone agreed on that. And no one disputed that the August 24 agreement was valid as an entirely new agreement. The question for the court: Did Jenkins still have the right to cancel two months after the original contract was signed? 

Boone County Superior Court Judge Petit heard the case, ruling in favor of Jenkins:

The original contract entered into between the parties improperly and in violation of statute omitted the right to cancel within three (3) days of receiving notice of insurance denial. That right was contained within the 'cure contract' and [Jenkins] exercised that right. The [c]ontract was not voided, it was cancelled pursuant to its terms.

The appellate court agreed: Mcgraw Prop. Sols. v. Jenkins, Nov. 18, 2020. Mcgraw lost out. 

But there’s another point here. What if the original June 11 contract had been letter-perfect – including the 3-day right to cancel? Would Mcgraw have had a case for breach of contract? I believe Mcgraw would have won that case. Mcgraw agreed to do the work for the price approved by Jenkins' insurer. The insurance carrier approved the claim and paid Jenkins $64,597.37. Failure to have Mcgraw proceed with the work would probably have been breach of contract. Mcgraw could have collected damages.

I’ve said more than once in this space: When a job goes bad, you better have a good contract. Mcgraw didn’t. That was an expensive mistake. If you need letter-perfect contracts the first time, no matter where you work, have a look at Construction Contract Writer. The trial version is free.

Checklist for Construction Contracts

Nearly all states require specific notices and disclosures in construction contracts. In some states and for some types of work, the list of required notices goes on and on. Worst case: California requires 35 separate notices in home improvement contracts. But anything your state requires is just the minimum. You contracts also have to cover the price, the site, the plans, etc. But plenty more could be in your contracts.

Here’s my list of optional topics for construction contracts. Scan through this list. Think of recent jobs where an extra sentence or two in the contract could have avoided an argument or saved some money.

Site safety, protection and emergencies.

• Who is responsible for project safety?
• Who is responsible for fire safety?
• What response is required in an emergency?
• Who is responsible for protecting new and existing work?
• Who supplies fencing and toilets?

 Hazardous materials.

• Any limits on use of asbestos, flammables or lead?
• Will explosives or welding equipment be allowed on the site?
• Who is responsible for hazardous materials discovered on site?

 Survey and layout.

• Who will do the survey and job layout?
• Who is responsible if there are errors in the survey?

 Permits, fees and taxes.

• Who applies for the permit and gets approvals?
• Who pays for permits and approvals?

 Utilities, cleanup and job sign.

• Who provides temporary utilities?
• Who arranges for permanent utilities?
• Who cleans the job site?
• Is a job sign either allowed or required?

 Role of the superintendent, architect or engineer.

• What is the authority of the owner's representative?

 Subcontracts and subcontractors.

• Can the owner reject subcontractors?
• What obligation does the owner have to subs?

 Use of the site and adjacent property.

• Any restrictions on use of the jobsite by the contractor?
• Does the owner have free access to the site?

 Responsibility for surprises in the job.

• Who is responsible for a mistake in the plans?
• Will the contractor get extra compensation for surprises?

 Changes in the work.

• Can the owner insist on changes at a set price?
• Are written change orders required?
• Who pays for changes required by law or a plan defect?
• Is there a formula for pricing extra work?
• What changes are charged to the owner?

 Warranties, defective work and callbacks.

• Can the owner reject work considered defective?
• What defects qualify for a callback and for how long?
• What warranty is included?

 Handling claims and resolving disputes.

• How will disputes be settled?
• Is a written notice of claim required?
• Is arbitration required?

 Liability for damage, indemnity and bonds.

• Who is liable for damage to the work?
• Will the contractor be liable for accidental losses?
• Will performance and payment bonds be required?
• What are the limits to liability?

 Contract boilerplate.

• Can rights under this contract be assigned to others?
• Do waivers have to be in writing?
• Does the owner have the right to audit records?
• Are there any limits to contract claims?

 Inspections and testing.

• Who schedules tests and inspections?
• Who pays for inspections and re-inspections?
• Is the contractor required to uncover work for inspection?
• What has to be in the written schedule?
• What types of delay by contractor will be excused?
• Will there be liquidated damages for non-excusable delay?
• Can the contractor collect for delay by the owner?
• How do we figure the cost of delay?

 Suspension and termination of the job.

• Does the owner have the right to terminate the job?
• Does the contractor have the right to stop work for non-payment?

 Completion.

• When is the job substantially complete?
• Will there be a punch list?

No contract has to cover all these topics. But at least consider these issues before submitting a contract for signature. The best way to be sure you touch all the bases: Construction Contract Writer. The trial version is free.

Mistakes in the Plans

I’m old enough to remember when plans were drawn by hand. A designer who wanted a particular detail had to physically draw that detail line by line, considering each line as it was drawn.

That’s not what happens today. A designer who wants a specific detail simply finds that detail in some old plan set. The designer clicks to copy and clicks again to paste into the current drawing. Little thinking is required. The result: All sorts of nonsense can end up in the plans. As the contractor, it's your job to find mistakes like this. First, I'll explain how. Then I'll explain why.

Bill Mitchell, an architect friend, recommends using a checklist to find design errors. Every item on this list has some impact on cost. 

The Six Cs of Plan Review

Examine each of these categories separately. First, look for anything that’s missing. Are the plans complete? Then do a second review to be sure plans and specs are consistent. Continue through the list one “C” at a time.

Complete – Are the plans an accurate and thorough representation of what’s intended? Is every detail that’s called out in a bubble actually drawn somewhere? Are enough sections shown to define the project?

Consistent – Is each sheet of the plans consistent with every other plan sheet? Are the plans consistent with what’s in the specs? Find yourself a light table. Overlay sheets on each other, one sheet at a time. Does the ceiling plan match the floor plan? Do light fixtures fall where air conditioning grilles are already located? Do plumbing vents on the roof pass through heating and cooling units?

Clear – Ambiguity in plans is the enemy of productivity. Good plans require the least improvisation. Are all key dimensions called out? As a contractor, you’re entitled to scale dimensions off the plans. But if there’s room for several interpretations of what’s required, do you bid the worst case or the best case? Plan details are usually the last step in the design process. A set of plans light on details will be heavy on change orders.

Correct – Begin by checking the length of one outside wall. Add up the chain of dimensions along the entire wall. Then check the full length of the opposite outside wall. Checking to the center of walls isn’t good enough. That makes the framer do the math. Be sure the two dimension chains match. If they don’t, it’s called a bust in the plans. When you’ve checked the length of all opposite outside walls, begin checking dimensions of inside walls. When you’re sure all wall lengths are right, start checking wall heights.

Constructible – Every designer is perfectly capable of drawing plans that can’t be followed at any reasonable cost. Be sure the plans allow enough space for trade contractors to complete their work. For example, does the plenum above a ceiling have space for both duct and conduit? In a residence, be sure framing details leave enough room for drain lines. If space is tight, your plumber, electrician or HVAC contractor will find a way. But you may not like the result.

Cost – Designers aren’t always sensitive to cost issues – either construction cost or the cost of maintenance. Favor materials that are readily available and that can be installed using conventional construction techniques. For example, almost all construction materials come with square corners. Building a semi-circular wall requires forcing square materials into a round shape. It can be done. But waste will run up costs with little benefit.

How to Protect Yourself

Architects and engineers use contracts that shift responsibility for finding design flaws to the contractor. You’ll see “verify in field” stamped on many plan sets. Whether you see “VIF” or not, both law and common sense give you, the contractor, at least shared responsiblility for errors on the plans. If you aren't eager to accept liability for mistakes by others, use Construction Contract Writer to shift liability back where it belongs. The trial version is free.