Disclaimer: Nothing in this blog should be interpreted as a substitute for professional advice from an attorney practicing in your community. Only local counsel can appreciate the business and legal environment under which a construction contract is drafted, negotiated and executed. Gary W. Moselle represents Craftsman Book Company, publisher of Construction Contract Writer.
Craftsman Book Company
News Headline: US housing starts drop to the lowest level since 2015.
Government restrictions, lockdowns and a slowing economy have added a layer of problems for residential contractors. When work slows, income dries up. Expenses like debt service and overhead continue as if nothing had changed. Too much of that can stress any construction company.
Here’s a checklist to help your company survive long enough to thrive once again when the pandemic is history.
Cherish cash. Money to a construction company is like blood circulating in your veins. When the flow stops, no contractor lasts long.
If you’re using advances and progress payments on the current job to satisfy creditors on prior jobs, you’re transferring debt. That’s like a game of musical chairs. When the music stops, as it has now for many, you’re stuck with bills that can’t be paid. My advice when cash is short: Use the money and credit that’s available to meet expenses on the current job. Keep materials and supplies coming and keep meeting payroll. Creditors owed on prior jobs will have to wait.
Be candid with those you can’t pay. Keep a list of creditors and the amount owed each. Tell creditors, “We’re short on cash right now due to the economy. I keep a list of who’s owed what. You’re on my list. No need to make threats. I promise to pay when cash is available. That’s the best I can do for now.”
That should satisfy some, at least temporarily. Others will threaten suit. Secured creditors will take back their security. Don’t let lawsuits bother you. Getting sued isn’t so bad. It’s the sign of a desperate creditor. Months will pass before anything actually happens. As time passes, most creditors will find a reason to compromise the debt, especially if you agree to make at least token payments. Other creditors may go belly up or simply give up trying to collect. Either way, you get months of breathing room and remain in control. The goal is to stay in business. You’re in survival mode. Keep working. Keep earning advances and progress payments on current jobs.
Focus on profits. When work is scarce, it’s tempting to look for larger jobs that can keep your crews and subs busy long term. Unfortunately, jobs like that are the most competitive and usually carry the slimmest profit margins. Smaller jobs often come with more generous margins. Larger, better-financed contractors can’t be bothered with the distracting trivia that’s common on small jobs. If you’re prepared to deal with picky, indecisive, argumentative owners, and if the profit margins look promising, consider stepping down a notch. Smaller jobs often come with shorter payment schedules and fatter margins.
Be selective. Don’t take on extra work just for the extra cash flow. No contractor loses money on every job and makes it up in volume. Doesn’t happen. More often, extra low-margin work results in extra headaches, especially when finances are tight.
Plan for the recovery. When too many contractors are chasing too little work, put your business in mothballs for a while. Construction contracting will pick up again. It always does. Use the idle time to do strategic planning. Where will the opportunities be when business revives? What skills and equipment do you need to capitalize on that revival? How will you finance growth of your company when the economy rebounds? Get yourself and your team ready to jump back into business. Have a plan. Focus on a particular job or area where success is most likely. Every major change in the economy creates pockets of opportunity. Change is coming. Commit to preparing yourself and your organization for that day.
A skill ever contractor needs: Writing contracts that comply with state the law and protect against the unexpected. For that, there's no better tool than Construction Contract Writer. The trial version is free.
Contractor Liability for COVID-19 Claims
Who pays when someone on a construction site gets sick or dies from COVID-19? Long after the pandemic has passed from headline news, lawyers for plaintiffs and defendants will be battling over this issue. But I see a more immediate question: What can contractors do right now to avoid COVID claims?
Rule of thumb: Occupational injuries are covered by workers’ compensation insurance. All states require that employers carry workers’ comp. Scope of coverage varies by state. But workers’ comp in every state covers occupational hazards. No doubt in my mind, COVID is an occupational hazard on construction sites. Crews have to work together, sometimes in confined spaces and often sharing tools. Expect any employee who gets COVID on the job to have a claim likely to be settled by the workers’ comp system. A contractor has no liability for that work-related injury because worker’s comp is an exclusive remedy. In return for automatic coverage, employees give up the right to sue their employer.
But There’s a Loophole
In most states, an employee can still sue for on-the-job injury if the contractor’s conduct was “deliberate”, creating a substantial certainty that injury or death would result. That’s a high hurdle but is likely to become an issue in future claims. In a case filed last month (Toney Evans v. Walmart), a Walmart employee died of COVID. The employee’s estate claims Walmart knew sick employees were coming to work. Walmart didn’t isolate infected employees, didn’t disinfect the store and failed to follow guidelines from the CDC.
It's easy for construction contractors to stay out of the “deliberate” category and thus avoid liability. Get a copy of the CDC standards for construction workers and follow the CDC recommendations.
What About Liability to Subs?
Most work on construction sites, especially on residential jobs, is done by subcontractors. Any sub with employees has to have worker’s comp insurance. But many subs are small firms, often a sole proprietor with no employees. Most states don’t require the self-employed to buy workers’ comp insurance. So, a self-employed sub infected with COVID on your job could have a liability claim against your company – for both medical treatment and time lost from work. That could be expensive. Your workers’ comp policy isn’t going to help. Workers’ comp covers only employees, not your subs. So how do you protect yourself? The answer is in your subcontracts.
Written subcontracts can:
- Require subs to provide workers’ comp coverage for everyone on the job.
- Require subs do the same in every sub-sub contract they write.
- Include an indemnity clause that makes the sub responsible for damages resulting from the negligence "in whole or in part" of either the subcontractor or a sub-subcontractor
It’s too soon to know how much liability for COVID losses on construction sites will fall on contractors. Politicians in Washington DC and state capitals are wrestling with employer liability for pandemic losses. But your contracts can protect against COVID-19 losses right now, no matter what the politicians decide. To draft subcontracts that protect against the unexpected, have a look at Construction Contract Writer. The trial version is free.
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 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?
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.
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. Continue reading
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.
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.
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.
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. Continue reading