Ten New Year's Resolutions for Contractors

Given the approach of the New Year, I have been reflecting on the mistakes that I see contractors make and how to prevent the severe consequences that can occur as a result.  If you follow these resolutions, I assure you that you will prevent most conflicts with your clients, or at least protect yourself in the event of a dispute.

1.  Make sure that all of your licensing and insurance policies are up-to-date.  In most states, the penalties for not being properly licensed can be severe, including double or triple damages, attorneys' fees and costs awarded against you.  Follow the requirements for your profession.  If you do renovation work on pre-1978 homes, make sure that you are lead-certified.  Have proper insurance to cover your business and your employees.

2.  Learn how to properly estimate a job.  This may be the biggest mistake I have seen contractors make this year.  They have cut their margins and not allowed for increases in pricing of materials or labor in bidding their jobs.  As a result, they are not allowing enough latitude for the inevitable issues that arise during a construction project.  Within the last month I have received calls from at least four contractors who are having trouble getting paid, built all of their profit into the last payment, mis-bid the job and have to put money into it to finish.  This is the way you make a living.  Learn how to educate your customer and protect yourself.

3.  Define the scope of the work.  Educate your customers and make sure they know what they are getting.  Clients will always assume they are getting granite when it is your intention to install Formica.  Designate materials to be used clearly.  Use as much detail as possible.  If something is going to be "builder's grade," make sure the clients know what that means.

4.  Make payment contingent upon milestones reached.  Don't let your work get ahead of your payments, and don't let the payments get ahead of the work.  This keeps both sides honest.  If the payment gets ahead of the work, the owner may lose trust that you will finish the job.  If you do your work ahead of the payments, the owner may start delaying when you ask for a check.  Numerous disputes develop because the payments are not in balance.

5.  Make sure you have a good written contract.  Good contracts establish the expectations of the parties while the relationship is good.  In law, a contract is a "meeting of the minds."  It spells out the payments, scope of the work, date of substantial completion, warranties, basis for termination, dispute resolution alternatives, etc.  I have written so many blog posts about why you need a good contract that I can't spell it out here, but read the archives.  A good contract will help resolve any dispute.  It protects everyone.  Many states also require a written contract under the law.

In addition, have an attorney review your contract!  This is well-worth the money, and will protect your business.  It's a worthwhile investment and will help you sleep at night. Seriously. I even charge flat fees so clients can call me when they have a question about their contract.

6.  Have written contracts with your subcontractors.  I get it.  Most of you have been working on a handshake with your subs for years.  However, now is the time to change your policies and have a written agreement.  Your subs should agree to indemnify (pay you back) you if a claim is brought against you for something they did.  You should have a written scope of the work so the responsibilities are clear.  Under the RRP rule, you must submit your documentation to the homeowner within thirty days of completing the job or upon final invoice.  You therefore need the documentation from your subs before they get paid.  This is in the archives as well.

7.  If you are working on a time and materials basis, invoice your clients weekly.  I promise you that if you have a T & M contract with your clients, one day they will wake up and realize that they have written you a blank check.  If you invoice them infrequently, they will have no way of checking whether your labor charges are fair.   They are also more likely to dispute your charges if there is not total transparency in your billing.  T & M contracts do not work well for the contractor who does not maintain good business practices.  You must communicate with your clients at least weekly by email or in person to keep them apprised of costs and whether you are working within your budget.  If not, you could have a nightmare on your hands as lawsuits about overcharging are very expensive to litigate.

8.  Designate who has the authority to make decisions in your contracts.  This is necessary from the homeowner as well as the contractor side.  You do not want your clients asking your subs if they can make change orders and having them rely on their response.  You want them to know who has the authority on the job site or how to reach the contractor by email or cell.  You also want to be able to rely on the instructions that are given by clients.  I see these issues arise most frequently between spouses.  If one spouse authorizes a change order, you don't want the other one saying that it was not okay.  It's nice to be able to point to the contract and say that you relied on a person with authority.

9.  Make sure your clients know that the job will probably exceed the budget by at least ten percent.  If I had a dime for the number of homeowners who have been shocked by the fact that their job exceeded their  budget, I would be a rich woman.  It is your job to educate your clients.  Do not be coy.  Tell them that more often than not, there are concealed conditions that will increase the cost of the project. Make sure they have a cushion built into their budget.  I can't tell you how many homeowners are blatantly refusing to pay for change orders because they were unanticipated.  Tell them, and then tell them again.

10. Finally, all change orders must be in writing and signed by the parties!  They must state the change in the contract price and how the date of substantial completion will be affected by the change.  This sounds so simple, but I bet I could prevent 90% of all disputes if contractors and homeowner would follow this simple rule.  Contractors laugh when I say that homeowners always believe that a minor change (can you add two outlets?) is free, and homeowners are always shocked when they are charged for verbal change orders.  Never, ever rely on a verbal change order.  Document everything.  E-mails are fine.  Just make sure you have a return receipt to show that they are read.

Happy New Year!  Hopefully I just saved you thousands of dollars worth of legal expenses in 2012.

When the EPA Comes to Call

I received a call last week from a home contracting company in the Midwest about a franchisee who had received a letter from the EPA.  They were advised that a representative would be coming to their offices or the job site to review their procedures under the Renovation, Repair and Painting Rule.  Given that the federal fine can be as high as $37,500 per day, per infraction, they were quite concerned about how to handle this visit and avoid any problems.  I advised the following:

1.  Establish whether your work is covered.
   a. Is renovation work being done on pre-1978 homes?
   b. Does the work disturb at least 6 interior sq. ft. of paint or 20 exterior sq. ft.

2.  Put together a loose-leaf notebook with your certified firm and certified renovator certificates.  Include any  initial course completion certificate and the most recent refresher course completion certificate.

3.  Have a file for each homeowner with an acknowledgement that the Renovate Right booklet was received by the homeowner.

4.  Maintain documentation to show that the certified renovator was on site during posting of signs, work-area containment and cleaning verification.

5.  Demonstrate that on-the-job training was provided  to other workers (who have not taken the certified renovator training course) on the lead safe work practices to be used in performing their assigned tasks.

6 Ensure that the work practices are being followed, including maintaining the integrity of the containment barriers and ensuring that dust or debris does not spread beyond the work area.  Take pictures to provide evidence that the rules were followed!

7. When requested by the party contracting for renovation services, must use an EPA recognized test kit or
must collect paint chip samples, submit them to an EPA-recognized laboratory, and obtain test results from the laboratory to determine whether components affected by the renovation contain lead-based paint.
(For more information regarding test kits call the National Lead Information Center at 1-800-424-LEAD
(5323), or check our web site at www.epa.gov/lead/pubs/renovation.htm).  Note: you must assume leadbased paint is present for housing and buildings covered by this rule, unless testing is done that determines
the components affected are lead-free.

8. Show that the certified renovator was available, either on-site or by telephone, at all times the renovations were being conducted.

9. Keep documentation of the  project cleaning verification.

• All documents must be retained for three years following the completion of a renovation.
• Records that must be retained include:
• Reports certifying that lead-based paint is not present.
• Records relating to the distribution of the lead pamphlet.
• Documentation of compliance with the requirements of the Lead-Based Paint Renovation,
   Repair, and Painting Program.  This information must also be given to the owner and, if different, the
occupant of the housing or unit that was renovated (EPA has a sample form that is available at
   www.epa.gov/lead/pubs/samplechecklist.pdf)

When the Homeowner Cuts Corners

I have encountered a new issue in home renovation projects that should put contractors on alert. Perhaps it is even time for a new contract clause.  I assume this is due to the state of the economy and the widely available access to information on the Internet, but homeowners are taking their construction into their own hands.  In one situation, the homeowner insisted on buying her own fixtures at a well-known hardware chain and asked the contractor to back the allowances out of the contract price.  In another, the contractor was told which personnel were acceptable on the job and was presented with a never-ending punch-list.

In both situations, the outcome was the same; contractors were seeing their profit margins dramatically reduced. What to do?  As always, the responsibility for educating the homeowner falls on the contractor.  The homeowner needs to understand that the budget should allow for at least a 10% increase over the contract price as a result of unanticipated change orders.  In addition, I strongly recommend that contractors build in a cushion into their pricing and that they mark up all supplies and labor.

You may think you are doing the homeowner a favor by passing on items at cost, but you are not allowing for overhead and other costs.  The homeowner must understand that the contractor has a relationship with his suppliers and will have more control over quality, timing of delivery and installation of fixtures if he arranges for the purchase of these items.  For that reason, I am considering including a clause in my contracts that states that the homeowner may not start bargain-hunting for supplies.  I already include a disclaimer for owner-supplied materials, but perhaps it is time to insist that homeowners stop micro-managing the process.  Or, alternatively, perhaps the contractor should insist on a mark-up if the homeowner wants to buy his own materials.

Finally, the homeowner needs to be taught what is an appropriate punch-list item and what is not.  I have a lengthy description in my contracts about what constitutes punch-list, latent defect and warranty items.  There should be a time limitation for identifying punch-list items and having them addressed.  Projects need to end.

These situations are remarkably similar to parenting.  Contractors need to set limits with their clients and define the scope of the relationship in addition to the scope of the work.  After all, they need to be able to earn a living!

ADR in Construction Disputes

I just read a useful article on arbitration in construction disputes by attorney Robert C. Hendrickson of Duane Morris.  You can read it here:  http://www.jdsupra.com/post/documentViewer.aspx?fid=ccec1931-5c2e-4607-a7ad-fcb3481513d3&utm_source=twitter&utm_medium=jds&utm_campaign=building

Your Contract Was the Best Money I Ever Spent

A client really said this to me last week.  He said the difference between having my contract now vs. when he had a similar problem many years ago was that now he can sleep through the night.  Here's the story:  client was doing a major construction job for a homeowner.  The homeowner was delaying in making decisions, and the contractor was wondering if he could terminate the contract before making a major outlay for the next step.


He called me, and I looked at his contract, which included the following provision:

"If Owner fails to comply with the provisions of this Contract, Contractor may terminate this Contract and retain any deposit or monies received as liquidated damages, or at the option of Contractor, Contractor may proceed for specific performance or any other available legal or equitable remedies.

Owner will be in default under this Contract if any of the following events take place:

(b)   Owner in any way fails or refuses to perform any provisions of the Contract and the Contract Documents required of Owner."

Since the Contractor could terminate the contract if the Owner did not perform any provisions of the Contract (the homeowners were causing an unreasonable delay), the Contractor was within his rights to cancel the contract.

This situation demonstrates the importance of a good contract. The contract clearly spelled out the Contractor's rights when the Homeowners were not cooperating. This saved him a huge amount of anxiety over an uncomfortable situation.  As we lawyers like to say, "you can pay me now or pay me later, but later is always more expensive."

So, investing in a good contract will protect you if issues arise over the course of your project.  I would also like to add that it was awfully nice to have a client appreciate the work I did for him.

Time for "Spring Cleaning" in Construction

When the Renovation, Repair and Painting Rule came into effect, there was a flurry of activity as contractors became concerned about how it would affect their businesses.  They were facing the additional costs of certification and compliance and started thinking about lead poisoning in a way that they never had before.

There was always a group of contractors who thought that it was all smoke and that it was not worth the effort.  They never got trained or certified, and were/are able to underbid their competitors for renovation jobs.

As months passed, I heard the buzz of angry contractors who made the effort to do it right and follow the law.  Many felt that it was a joke.  Registration in certification classes waned. At the same time, the economy has improved, and contractors are getting back to business. They don't have as much time to learn the nuances of OSHA or deal with paperwork.

In the last two months, however, stories have started cropping up around the country about fines.  All of a sudden, contractors and construction companies are being visited by the EPA, OSHA and the Department of Labor to see if they are following the RRP Rule, OSHA safety practices and maintaining proper worker's compensation insurance.  The government may start fining businesses for the classification of employees as independent contractors. Compliance is becoming more important.

So, as you prepare for warmer weather, it is time to do some internal "spring cleaning."  Make sure that your insurance coverage is up to date and as comprehensive as it should be.  Follow the laws and maintain proper documentation.  Consider having your contracts reviewed to make sure they are in compliance with your states' laws and that they adequately protect you.  As they say, "better safe than sorry."

Worker's Compensation Information Available Online At the Massachusetts Department of Labor Website

Mark Paskell first posted this at his blog, 

http://www.thecontractorcoachingpartnership.com/Blog-Contractor-Coaching--Construction-Business-Coach-EPA-RRP-Lead-Rule/, but I think it is so important that I wanted to post here as well.  Make sure all of your subcontractors have worker's compensation policies if they have employees.  If not, you may be held accountable if someone gets injured on the job.  Bravo to the government of MA for making this information available to the public.

Here is a brief excerpt from the Massachusetts Department of Labor website;                                      

Patrick - Murray Administration Launches Free Web-Based Tool

Will help Public Verify if Businesses have Workers Compensation Insurance Policy

Boston, MA - The Executive Office of Labor and Workforce Development (EOLWD) today announced the launch of the Massachusetts Online Proof of Coverage Application (POC), a free web-based tool that will assist the public in verifying whether a particular business has a current workers’ compensation insurance policy.  

While the POC application is not designed to detect fraud, it may also assist EOLWD’s Department of Industrial Accidents’ investigations in determining whether fraud exists.  

Employers are required by law in Massachusetts to carry workers compensation insurance to assist workers in the event that they are injured on the job. While the vast majority of Massachusetts businesses carry a policy, those who are not in compliance shift the burden onto those business that do. As a result, over $53 million has been paid out of the Workers’ Compensation Trust Fund over the past 10 years to pay for injury claims of workers who were employed by businesses that were not in compliance. DIA works closely with businesses through payment plans and more aggressive enforcement measures to make sure they are compliant.