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
Earlier this month I got a question from a construction contractor negotiating a deal with the owner’s attorney. The attorney wanted a termination clause in the agreement. The contractor wanted the job but didn’t want to give his client the right to back out of the deal once work started.
“Why even have a contract if the owner can terminate the job any time he wants?”
Good question. But there’s a good answer. First, a few basics.
Construction contract law can be more than a little complex. Every state has different requirements – notices, disclosures, warranties, waiting periods, penalties. The list grows longer every year as consumer protection laws multiply. What’s a contractor to do?
I’m going to have a suggestion a little later. But first I’ll offer an example of what not to do.
In January of 2015, Nicholas and Monica Koudela selected Bill and Bob Johnson to build their new single-family craftsman style home in Willowick, Ohio. The Johnsons offered a contract to do the work for $227,200. The heading on the signed agreement showed "Johnson & Johnson Builders" as the contractor.
Johnson & Johnson Custom Builders, LLC is a limited liability company licensed to do business in Ohio. The Johnson’s contract with the Koudelas omitted the words "Custom" and "LLC" from the company name. A little mistake. But it kept the Johnsons in court for two years, as you’ll soon see. Continue reading
Eighteen states have made changes to construction contract law in the last few months. Some of these changes are trivial. A few will affect nearly every contractor in the state. Here’s a state-by-state summary of the highlights: Continue reading
I’ve heard that contractors should do business as an LLC so they can’t be sued. Is that true?
A conversation I had earlier this month answers the question.
But first, let’s define some terms. Members of an LLC (limited liability company) get the advantage of limited liability (like a corporation) but have the option of paying tax as either a partnership or a corporation. The IRS considers a single-member LLC to be the same as the owner for tax purposes but a separate company for employment purposes. The cost of setting up an LLC to comply with law in your state will be at least several hundred dollars for filing and recording forms. Plus, most states charge LLCs a minimum franchise tax. In California that’s $800 a year plus a fee on gross revenue that adds another $900 for up to $500,000 in income.
Last week I got a question from a contractor who had read the June 2016 Consumer Reports article on home improvement. He told me that nine out of 10 contractors in the CU article claim to offer a written guarantee of their work. He wanted advice on the guarantee he should offer. My answer: “Fine. We can work up a written warranty. But understand that all your jobs come with a warranty already – even if you never breathe a word about it in the contract.”
This blog is for contractors. But I get questions from owners too. The most common is “Can’t I just fire my contractor – order him off my property?”
I had a question like that last week. The owner was disgusted when his home improvement contractor damaged the existing electrical system, didn’t show up for days and didn’t return calls. “Can’t I just fire this guy?”
Mike Mandell owned a residential lot in Paradise Valley, just outside Livingston, Montana. It was a beautiful site for a home – overlooking the Yellowstone River. Mandell asked the Bozeman firm of Bayliss Architects to design his new home. Mandell and Bayliss met on the site and struck a deal: Bayliss would design a 2,000 square foot home that could be built for $170 per square foot. His fee would be 8-10% for architectural design and structural engineering. So far, so good. But Mandell had one more request. And this is where Bayliss got into trouble. Mandell wanted Bayliss to handle construction management. For an extra 7-10%, Bayliss agreed to act as project manager and general contractor for the job.
A case decided in Indianapolis last week makes the point once again: Any time there's a dispute on a construction project, the contractor better have a good contract. Jim Dorey didn't and paid the price. Here's what happened.