Webinar: A Crash Course in Construction Contracts – How to protect payment upfront
In this webinar on construction contracts, we cover:
- The basics of construction contracts
- How contracts affect your lien rights
- The difficulty of filing a lien without a contract
- Getting the GC to approve contract edits
- Special contract provisions that help prevent payment issues
- How to enforce a contract to resolve a problem
- And lots more!
Nelson Mullins Broad and Cassel
View Jason’s Expert Profile
Senior Director of Attorney Services
View Seth’s Expert Profile
Seth : Hey everyone, hope everyone’s having a nice day today. This is Seth Bloom, I’m Senior Director of attorney services and we have an exciting webinar again for you. Our host today, and our guest speaker, our expert speaker, is attorney Jason Lambert from the law firm of Nelson and Mullins. He’s in the Tampa Bay area and we’re going to be talking as we always do about construction law. He also has a really cool blog and he’s going to talk about that called Hammer and Gavel. So without further ado, I’m going to let Jason take it away and he’s got some slides and let him start talking.
Jason : Hey, thank you so much Seth. It’s a pleasure to be here and to get to speak to everybody today. I know we’re going to take some questions too, so if people have them I want them to feel free to submit those as well. Just by way of a quick background on myself, as Seth mentioned, I’m a construction attorney in the Tampa Bay area at Nelson Mullins. We have offices around the country though. I’ve tried to steer today’s presentation to be a little bit broader so that if there’s contractors who aren’t in the state of Florida, this will be of value to them as well. And also just by way of my own background, I spent about 10 years in the construction industry before I ever became an attorney. I spent a lot of time building custom homes, like commercial work and doing a lot of remodeling down here and now I’ve been practicing law representing contractors and subcontractors, dealing with a lot of the same payment issues that Levelset’s actually trying to address.
Today what I wanted to talk about and get into was who needs a construction contract and how your construction contract can actually help mitigate or eliminate payment issues before they ever come up. There’s really just a few topics that I want to cover, just a brief overview of what a construction contract is and can do and who needs one. Spoiler alert, the answer is everybody needs one. And then how you can use that contract to help prevent problems, and then some simple ways that you can enforce your construction contract. It’s not just by filing a lawsuit. There are other options out there and you can certainly contract for those other options.
Jason : Just to go ahead and jump right in, your construction contract is one of the two most important documents for your business. And both documents, the most important documents you have your construction contract and your construction lien or whatever preserves your lien right. Whether it’s a notice to owner, a pre-lien notice, anything like that. And the reason those are the two most important documents is because they set forth your rights and your obligations with respect to things. The thing that protects your ability to get paid and they’re the thing that spells out exactly what you can and cannot do regarding a property. I cannot overstate how important that contract is. It’s just as important as a lien in many cases for most contractors.
Learn more about lien rights: What are lien rights, and who has them?
Q: Are contractors legally required to have a contract?
Seth : Jason, let me ask you a question. In Florida, is it legally required to have a contract or just good practice?
Jason : For most states, it is legally required that you have a contract to support the lien, because usually what is a lienable amount – or what is an amount that can be included in the lien – is going to relate in some way to your contract. Either, have you achieved a certain milestone that allows you to include that amount in your lien? Or were you doing work under a contract that supports a lien?
For example, in Florida and a handful of other states, if you don’t have a contract, then you don’t have a lien right at all.
And to be clear, it can be in some instances a verbal contract or a handshake agreement. It doesn’t have to be very formal, but 9 times out of 10 a contract is going to be a requirement to support your lien right. That’s actually the last point on the slide that should be on your screen now, is that they are usually required to support lien rights, in that there has to be either a connection to the property owner, or a connection to the general contractor and then to the property owner. That gives you a lien right on the property.
Most of you know that your basic construction contract, it’s going to spell out the required terms for you. It’s going to put the price of your work, the scope of your work, timelines for completion, set forth your responsibilities in terms of what you’re providing as a contractor. Set forth your customer’s responsibilities in terms of when they have to pay you, when they have to get you selections.
When I talk about construction contracts, I do want to be clear to everybody. You certainly can have a 35 page contract that covers every possible scenario and goes into an infinite amount of detail on what happens under certain circumstances. But for many contractors, even if you just had your invoice or estimate and attached to it a couple of pages of “Payments are due within five days of invoicing,” and “Here’s what substantial completion means,” and “Here’s what the circumstances where you can or cannot withhold payment,” or “Here are the circumstances where either party can terminate the agreement.”
That doesn’t have to be 30 pages long, it can be a couple of pages long and it gives a tremendous amount of clarity to how you’re going to operate as a contractor and how the customer is going to treat you as a contractor. And I always say contractors, whether they know it or not, they’re just as highly regulated as doctors, as attorneys, any other number of licensed professionals, but it’s still a business that very much can get run on just a handshake and somebody’s word.
Nowadays that unfortunately just doesn’t always seem to work out in the end. You do need to have a written contract and having a written contract will encourage a homeowner or a property owner to treat you as the professional that you are and not just as somebody who’s working on their house.
Q: Is it hard to file a lien without a contract?
Seth : Let me ask you this. Is a lot of your litigation dealing with, for instance, when contracts are deficient or not there, then trying to perfect liens or defend liens. Is that a big part of your practice?
Jason : That is. Payment disputes, right now while sort of the economy is booming and everybody is busy and making money, absolutely payment disputes seem to be one of the most active parts of my practice right now. And that always boils down to the contract. What did the parties agree to do or not do at the beginning of the process? There’s absolutely times when I’ve had to tell clients, yes, I know you want to file a lien for $100,000 but your contract, the way it’s worded or the way the draw schedule was, you really only are entitled to file a lien for maybe $20,000. Or your contract didn’t cover how and when change orders were supposed to be paid or how they were supposed to be agreed to. All this extra work that you did may or may not be able to be included in your lien or you can include it, but you run the risk of having your lien declared fraudulent.
Absolutely, the contract and the lien rights go hand in hand and again, whatever clarity that you can bring to the relationship between the parties and how things are supposed to be done is always going to make it easier to enforce a lien. What I want to focus on it and a problem that I’m seeing in particular with these payment disputes nowadays is a lot of times they are coming up at the end of the project. They are coming up from usually a property owner all of a sudden either the relationship has been great between the parties the whole times and then now we’re at the end of the project and all of a sudden the property owner either starts to withhold payment or make unreasonable demands or take some sort of other action that suddenly turns a project that’s been going well, sideways.
And what I wanted to get into greater detail today for a few minutes are three different types of contract provisions that contractors can use to help mitigate the risk of this or eliminate the risk of it, particularly as it relates to payment issues. Jumping just to those, what those options are. Your contract first, you can put almost any term, as long as it’s not illegal in a construction contract or in any contract, it’s just essentially… Think of it as just essentially a set of rules that both sides are to abide by throughout the course of construction and you can put terms in there that are going to help you deal with or eliminate problem customers, or customers who become a problem, deal with customers who start having problems making payments or want to withhold final payment until every last little detail is finished and also problems with customers starting to make threats.
Jason : A big threat that I’m hearing now from people as they approach the end of the job is a customer who says, “Well, I’m not going to pay you unless you do X, Y, or Z. Even if it’s outside the contract, and contractor, if you refuse to do that, I’m going to leave a bad review for you on Y or I’m going to tell other people not to hire you.” And that’s becoming a really common trend nowadays.
Q: How can we get the GC to agree to our edits to the subcontract agreement?
Seth : It is funny how reviews online have certainly become powerful because one upset customer client can really change your digital profile. But we have a question from one of our more active participants and we thank you out there. And someone else also has the same question. It’s a bit detailed but I’ll try to read it to you:
“We have a proposal with notes that are critical to our work. We do our best to add our subcontract agreement as a rider to the contract. We are successful 50% of the time. How can we become 100% successful with adding our subcontract agreement with our notes to protect our organization?”
Jason : I assume that when they’re talking about their subcontract agreement, they’re contracting with a general contractor who’s been contracting with a homeowner. It’s really difficult to get that percentage up to 100% because you’re dealing with another business that they’re going to decide one way or the other whether they want to agree to your terms. There are two ways though that I have seen clients be more successful in making sure that whatever they want, their sort of usual mode of operation to be or their terms of service or their terms of how they’re going to do work. There’s two ways I’ve seen them be successful with getting that added onto.
The first is, instead of presenting the general contractor for every project with this additional set of notes or this additional set of terms, put it together as a master agreement and have a sit down meeting with the general contractor and try to have them sign off on this master agreement and then when you’re entering into future projects with them, you can just add some language at the bottom of your invoice or your purchase order that will incorporate that master agreement and it may be a lot easier to get them to agree to add this one page writer onto every job, then to add on a full subcontractor agreement every job. That’s one way that I’ve seen it work.
The second way that I have that I have seen it work, which maybe this is it not working though, is just simply refusing do business with people who won’t entertain executing your subcontract agreement. You certainly can look at the general contractor’s agreement and where there’s harmony between that and the subcontract agreement. You may be able to say, “Hey listen, we both have these agreements, they’re 80% the same. Here’s the 20% we really need to negotiate about,” and try to do that. But you certainly… If the terms are that critical to the conduct of your business or the survival of your business, then you might want to consider walking away from people who don’t want to enter into them.
I certainly advise clients of that all the time where we’ve put together a contract that’s designed to protect their business and they are dealing with a property owner or another contractor who won’t execute it. To me, a lot of times that’s a red flag that they’re unwilling to either negotiate or talk about things or that they’re unwilling to enter into a formal agreement. To me, that raises alerts about what they could be wanting to accomplish through this.
Q: Is a contingency agreement enforceable like a regular contract?
Seth : Laura asks:
“Our company uses contingency agreements as well as actual sales contracts. Are the terms of our contingency agreement just as enforceable as a regular contract?”
Jason : Yeah. Contingent agreements are absolutely just as enforceable as everything else. What you want to avoid with an agreement that has any sort of contingency clause in it is you… There’s language you can insert in there that essentially says, listen, the parties are agreeing that the total price for example, may not be known because we’re charging a cost plus a percentage or a cost plus a fee that’s going to be multiplied by the number of months of construction or something along those lines.
But, that they agree that this is how it’s to be calculated and under the law that’s almost as good and enforceable as a contract that just says, “You’re going to pay us $100,000 to do X.” So yeah, contingent agreements, the terms are just as enforceable and they’re just as important, maybe even more important than the terms of, say, a flat fee or a guaranteed maximum price contract.
And that actually really does sort of lead me into the next slide here are talking about dealing with problem customers and how you can use contracts to do that. A common area where a problem customer will arise towards the end of a project is a cost plus project or a cost plus a fee project because maybe they’ve had… A lot of times there’s not necessarily a great budget to go off of for the entire project and as you start to wind down, maybe they’ve started to run out of funds or maybe they still haven’t made up their mind on some particular selections and so they’re delaying the project, which is delaying you finishing and maybe collecting a sizeable amount of money or a percentage that you’re owed and wonder… There’s a few ways that you can incorporate language into your contracts to deal with these types of problem customers.
You can certainly set deadlines for when selections have to be made and include even liquidated damages provisions or penalties in there to help enforce that. You can set provisions for when the job site has to be available, not just times during the day, but also that the customer… If they’re going to disappear for two weeks in Europe on a vacation, they’ve got to let you know that or make sure that the property is still going to be available for work. And same thing, this works also between subcontractors and contractors. If the contractor’s going to go out of town for two weeks and instead of paying everybody on a weekly basis, he’s going to pay people when he gets back. This can also… Requiring notice of that can really help a job run more smoothly and you also can start to insert termination provisions in your contract.
I always have customers who are clients who are wary about giving people rights to terminate a contract, but you certainly want to have the ability to terminate a contract for cause where the other side breaches it or engages in certain behavior. But you also… I’ve started including for people termination for nuisance provisions, where if another contractor or a property owner is just becoming a nuisance, they’re harassing you or your staff, they’re being indecisive, they’re being super picky or they’re withholding payments for no reason. Those are all… While they might be minor things by themselves, over time they add up and that can give you a right to terminate, but only if it’s in your contract. I want to share a couple of sample provisions that I’ve drafted, and these are actually out of contracts that I’ve drafted for other clients. This first one that should be on your screen now is a sample selection deadline provision with a liquidated damages provision at the end of it.
It says that the client is going to… The client’s responsible for their finished selections and they’re going to make final selections within 45 days of the start of construction. This is actually for a project that was anticipated to go for about nine months. So getting everything done upfront. Think of all the change orders that eliminates, think of the problems it allows you to discuss at the beginning of the project. Usually when the relationship between the parties is still pretty good and everybody’s excited about this new project that’s going on, unless you get into all of that early so that you can have a smooth running job and job site for the rest of the project. And then at the very end of this paragraph, you’ll notice that it says that the contractor is entitled to charge the client $100 per day for any delays caused by the failure to make selections.
Again, it’s sort of a carrot and stick approach here. You have a carrot that’s helping… That’s giving the customer an incentive hopefully to pick out their selections early, but also a little bit of a stick in that if they don’t and that causes delays, they may have to pay you as the contractor some liquidated damages as a result of that. And that can be a very powerful tool that allows you to get customers to make selections. While also having some ability to protect yourself as a contractor.
Q: When should we take a client to court over a lien?
Seth : The next question is…
“We have a couple clients we’re dealing with that the job is done and complete, but they have fallen behind on payments. We put a lien on the property and have tried to communicate with them for resolution over the past 90 days. Original response check has been cut and we should receive shortly, then no one’s responded and they owe us $20,000. Do we proceed and take them to court on the lien? We’re at a dead end question. And it seems like a couple of people had similar back patterns.”
Jason : Sure, sure. It’s always a… It can be a tough call, especially in that dollar range, that 20 to $50,000 lien range because obviously that’s a significant amount of money to you as a contractor and you want to recover that. Certainly it can cost you some legal fees to get there. And one of the most common things that happens in response to a lien lawsuit being filed is the homeowner all of a sudden comes out of the woodwork with, “Oh, well this was defective, this was defective, this was defective, and so we don’t actually owe you any of this money or we only owe you a small portion of it.” That can cause some tension between is it worth going to court or not? Most States have a provision that the prevailing party on a lien claim is entitled to recover their attorney’s fees.
I actually have started advising most of my clients that if you have a construction lien and you feel very good that you’re going to recover something on that lien, that even if the other side says, “Of this $20,000 lien, $5,000 of the work was defective or you caused damage to my property that was $5,000.” I still think that it is worth it because usually there’s going to be a method for you to recover your attorney’s fees. And also, once the other side is facing the threat of possibly losing their home over it, you would be amazed at how quickly they come up with a way to pay and satisfy these things. I think that too… Nowadays you really do have to enforce a lien to really get the full benefit of it. And if you engage with the right attorney, it doesn’t necessarily have to be a super expensive sort of scorched earth fight over this.
You can find certain pressure points and really try to exercise those to get the maximum recovery out of there when you’re talking about a net of attorney’s fees and that also ties into other things that you can include in your construction contract. I mentioned that a lot of times a construction defect will come up as a result of a lien so you can include clauses in your contract that deal with those types of payment problems that can come up. But, one interest charges on late payments. That’s a pretty typical one. But limitations on what can constitute a dispute.
You can have it be in your contract where when the homeowner pays you, they’re waiving any and all claims to any disputes that the prior work was completed or was completed properly or so on and so forth. And if you do that throughout the course of construction, over four or five draws, by the time it gets down to paying the last draw, they’ve waived their right to complain about most of the prior work. You can eliminate some of that allegedly defective work rearing its ugly head at the end when they’re trying to avoid final payment.
Q: Is a change order by email legally binding?
Seth : I’m starting to have flashbacks from Contracts 101 in law school because someone put up a hypothetical here. I guess… And both of these are… You can interpret them through Florida law or how you want to do it, but Lori asks,
“If the client writes an email that just states, we approve you to make X but it does not reference the terms and conditions. Is this email legally binding?”
Jason : Yes, generally that’s going to be legally binding. Obviously you would like to get more. It’d be fantastic if they wrote you an email saying, “Yes we agree to X pursuant to the terms of the contract entered into between the parties on January 1st, 2020.” Nobody talks like that except for lawyers and even I don’t like talking like that.
Seth : And what about the enforceability of change orders? Because that was really what the next question… I’m boiling it down but they’re asking about, when someone makes a change order how do you enforce that within a lien if it’s not specifically written out in the original contract because it’s changed?
Jason : Yeah, absolutely. Under both circumstances, the best way is to get something in writing. So if you’re going to look at it from a good, better, best approach or a reverse best, better, good approach. The best thing would be when you get that email or you have that conversation on the job site and you agree to make a change verbally or informally through an email or through text message. Best thing is going to be to write it up on a change order form or write it up in a word document or something, send it to the other side, have them sign it, you sign it, put what the price is going to be in there, put what the terms are going to be. Do that even if it’s ultimately going to be a $0 change order. I’m a big fan of clients documenting changes in the work, even if it’s a $0 change because it makes clear what the parties were thinking in the event a dispute comes up later.
Sort of the mid-level approach to that is going to be the emails, like the email that was in our example there. Yeah, if somebody emails you and says, “Hey yeah, we approve, come out and do X work and we’ll pay you $1,000 for it,” that’s going to be sufficient for you to file a lien or to claim that there was an agreement between the parties as to what you were performing and what you were supposed to get paid for. Obviously, it’s lacking sort of the formality of saying this is part of this other contract or it’s going to be subject to these other terms that we would like to see, but it’s going to be enough to at least protect your right to payment and then sort of the worst version of it, if you will, is sort of the handshake deal on the job site. Maybe you’re tiling this particular area of the home and they say, “Oh, you know what? We really like how this tile looks. Let’s expand it into the next room,” and you go ahead and do it. Or your tile subcontractor goes ahead and performs that work.
That’s going to be difficult to say that there was a formal change order for it because it was really just sort of a short and verbal discussion. And one way that you can include language in your contracts to counteract that is to say, “Hey, the normal procedure for us is to execute a written change order, but if we do work at your direction and a written change orders isn’t executed, we’re certainly entitled to be compensated for the fair value of that work if we’re unable to agree on a price at a later date.” And that again can sort of set you up for being able to include those amounts in your lien, even if you didn’t necessarily have a written contract or a formal written agreement.
Those can all be provisions. Again, as I said at the beginning of this discussion, you can put almost anything in a contract and I highly recommend… I know that there’s a lot of forums out there and I’m actually a member of a couple of different contractor Facebook groups and people are always sharing contracts and provisions back and forth. I’m a big fan of contractors taking responsibility for their contracts and piecing them together on their own. But then I would highly encourage you to engage a professional, myself or somebody in your area to take a look at the contract and see how they can punch it up for you, how they can eliminate conflicting provisions and how they can make sure that it’s really accomplishing your goals there, whether it’s to protect you from problems getting paid or ensuring your lien rights are enforceable or dealing with these types of change order type issues. I always recommend that and I think that’s a great way to protect yourself as a contractor.
I did want to just touch on one thing with respect to the payments. I mentioned being able to charge interest on it and also being able to have something that would keep them from raising sort of the specter of defective work later. And that’s what this provision here does. It says, “If you pay late, it’s an 18% interest charge and you’re not allowed to withhold payment unless there’s a valid lien recorded on the property.” So if somebody says, “Hey, we’re not happy with how this looks,” or “We’re not happy with the way the job has been run the entire time,” that’s not a reason to withhold payment.
The only reason to withhold payment is a lien, and so you can protect yourself there. And then same thing here on this next provision. The goal of it is to limit the way that homeowners or property owners or contractors can use disputes to withhold payment. This is a very handy provision to say, “Hey, even if we have a punch list, that’s not a basis for withholding payment.” And that can be another very powerful a provision to include in your contract, especially when talking about lien rights.
Seth : Jason, we have about two or three more minutes, so I’ll let you wind down your presentation and then maybe I’ll ask a few more questions and we’re getting a ton of questions here. We’ve got over 134 people participating, but I’ll let you wind down and we really appreciate your time.
Jason : I appreciate it. This is fun and I just have one other thing that I want to talk about. We touched on at the beginning about problems with customers making threats as to giving a bad review or sort of tarnishing a contractor’s name around the neighborhood. One, you can always define in a contract what’s going to constitute a material breach of it. So you can say, “Hey, if we’re in the middle of work and you leave a bad review on our company while we’re in the middle of work, that’s a material breach and we have the right to stop work, withdraw and sue you for damages or claim damages against you for that.” The other thing that I’ve had a lot of clients start doing is going ahead and including a non-disparagement provision in the contract and I put an example of one up there on the screen that covers social media, verbal conversations, things like that.
Again, nowadays online marketing is becoming such… And online reputation is becoming so important that I think it’s something that contractors really need to protect themselves from. If there’s anything that you can do to do that, this is a way to do it. In terms of enforcement, we’ve talked a lot about, liens you can use to enforce a contract. Arbitration, is another very common or popular option, but I do want to open it up here for some more questions. I’m just going to put the last slide up. That’s my direct line on there, if anybody has any questions. Like I said, I work for Nelson Mullins, which while I’m in Florida, have offices throughout the country. Even if you’re not in Florida, we can at least chat and if I can’t help you, I can probably find somebody else in our firm who can. Hammerngavel.com is a blog that I write on construction topics. It’s also got all my contact information there. And then of course you can find my profile on levelset.com as well. But Seth, if you guys have any more questions for me, I’ve got time and I’m happy to answer.
Seth : Well I just really wanted to thank you and look, we have so many questions today that… And a lot of them are really highly specific issues that I don’t know that I want to ask them here in front of so many people. But what I encourage everyone to do, and I really want to thank all the participants today, you’ve asked some great questions. If we didn’t get to your questions, just cut and paste, cut them out right now and post them in the expert center. And if you’re in California, ask in California if you want to hear them from… And Jason can answer some in California or put them in Florida if they’re Florida specific questions.
But let’s not let these questions go. Let’s ask them. We want to be here to help you. And also please spread the word in the industry. Other general contractors, other subcontractors, suppliers, and anyone else in the industry can really take advantage of the expert center. I know some people talked about having some technical issues. We’re getting better and better. We used Ethernet today, so I think the sound was a little bit better. In addition to that, I know some people said, “Well, hey, this wasn’t really specific to my area or my state.”
We’re going to be doing webinars every week. We’re going to be doing a few live events a year. Hopefully one will pertain to your business or make a suggestion, I’m happy to take suggestions from users. If you’d thought this one was too much geared for general contractors and not subcontractors, we’ll have different ones over the course of the year. And we really want feedback from all of you users out there, because that’s what we’re here for. We’re here to build a community and bring on people like Jason that are nice enough to take their time, that charge a lot of money to answer their questions, to give us free advice right now to get us started on some of these processes. So if Jason, if you have anything else to say, the floor is yours. Other than that, we really appreciate you, and again, this is Seth Bloom from Levelset here working out of the expert center.
Jason : Thank you guys so much. I had a great time. Post your questions on Levelset or feel free to reach out to me directly with some of them. I’ll be happy to answer what I can and look forward to doing this again sometime. Thanks a lot Seth.
Seth : All right, thank you. And thank you to the users for all the nice feedback today. I really appreciate it.