Monday, January 23, 2017

The Paper Trail

Twenty years ago, a roofer could complete a construction project with a handshake and an invoice. Getting payment from customers has always been an issue, but the need for contracts and written documents was not as important as it is today.
Owners have become litigation and insurance savvy and know how to take advantage of an unprepared contractor. If a problematic project results in litigation, nine times out of 10 the party with the best “paper” will win the day. In other words, the party that has the most detailed and descriptive paper trail supporting its side will more than likely succeed in court.
A contractor, subcontractor, or supplier’s first line of defense to claims on a construction project is always the contract. The contract contains pertinent provisions that a party may use to pursue and defend potential claims. Although it is often difficult to negotiate the terms of a contract, to the extent possible, a contractor, subcontractor, or supplier should be aware of provisions that would help shield it from potential liability from claims. These provisions may include limitations on the types of damages that can be awarded, such as a provision that waives the ability to obtain consequential damages (pain and suffering, lost profits, loss of business reputation, etc.). In addition, contract provisions that require owners to provide written notice to roofers within a certain time period (3 business days) after the discovery of defective workmanship, may create a defense to an owner’s claims if the owner failed to provide sufficient notice.
Anyone involved in the construction industry should also keep accurate written records of all communications involving defective workmanship, delays or other claims on a project. These written communications can include daily reports, e-mail, memoranda, phone messages, and letters. Furthermore, if you notice defective work (that is not your own), make sure to take extensive photographs and/or video of the alleged problems. Visual depictions are especially useful in defending claims where contractors are hired to repair a building that is already suffering from defective conditions, water intrusion or pre-existing mold.
A party should also use common sense when issuing or authoring written communications. Barring any contractual provisions to the contrary, a good rule of thumb is that if it is good for you, meaning that it can assist you with bringing or defending claims, put it in writing. If it’s bad for you, pick up the phone and avoid putting something in writing that can later turn out to be a smoking gun if you are in litigation or arbitration.
Once the roofer has generated documents such as the contract, daily reports and follow-up correspondence, it is important that the roofer retain those documents in an organized file, especially if there is the possibility that the project could result in litigation. By generating and retaining documents which support the roofer’s position, a roofer will be better able to defend itself against litigious owners.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

By Trent Cotney for RoofersCoffeeShop.com
Trenton H. Cotney
Florida Bar Certified Construction Lawyer
Trent Cotney, P.A. 
407 N. Howard Avenue
Suite 100
Tampa, FL 33606

Monday, January 16, 2017

The Escalating Cost of Construction and Combating Price Increases

How can a roofing contractor protect itself from labor and material price increases on a project? The roofing contractor should first consider the payment method on a project. The ideal way to combat a cost increase is to perform the project on a cost plus basis. In other words, the roofing contractor’s payment is based on the actual cost plus a certain amount for profit and overhead. Although this payment method may be preferable, it is often difficult to obtain cost plus contracts given the desire for owners and prime contractors to have a fixed price.
Accordingly, the roofing contractor should consider adding additional terms to its contract to protect it from labor and material price increases. The roofing contractor’s contract should include a price acceleration clause which consists of the following:
If there is an increase in the actual cost of the labor or materials charged to the Contractor in excess of 5% subsequent to making this Agreement, the price set forth in this Agreement shall be increased without the need for a written change order or amendment to the contract to reflect the price increase and additional direct cost to the Contractor. Contractor will submit written documentation of the increased charges to the Prime Contractor/Owner upon request. As an additional remedy, if the actual cost of any line item increases more than 10% subsequent to the making of this Agreement, Contractor, at its sole discretion, may terminate the contract for convenience.
There are three components to the price acceleration clause. First, the price acceleration clause provides that the roofing contractor may adjust the contract price to reflect the revised actual cost of the labor and materials. Generally, assuming the contractor is using its own labor force, there should not be a significant enough increase in labor costs to warrant an adjustment of the contract. As a result, the price acceleration clause is primarily limited to increases in materials over the course of a project.
The second component of the price acceleration clause is providing the prime contractor or owner with documentation supporting the claim for additional compensation. By doing so, the roofing contractor is providing the prime contractor or owner with evidence of the increase in actual cost.
The third and final component of the price acceleration clause can be a termination for convenience provision if the price of any single item increases by more than 10%. Although disfavored, a termination for convenience clause may allow the roofing contractor to escape a contract if the cost of materials has increased exponentially or the materials themselves have become difficult or impossible to find. Generally, this last component is removed because of the uneasiness prime contractors and owners have with the idea of a termination for convenience.
A roofing subcontractor may find it difficult to include the price acceleration clause in its contract with a prime contractor because both the owner and the prime contractor are looking for fixed prices prior to the start of the construction. In that situation, the roofing subcontractor may buy and store materials prior to the start of construction to avoid increases and may request a deposit to purchase the requested materials depending on the nature of the job.
To the extent that a roofing contractor adds a price acceleration provision to their contract, the roofing contractor should consider requesting that the prime contractor add a similar provision in its contract to allow the prime contractor to seek additional funds from the owner for any labor or price acceleration that occurs. Roofing contractors should also use common sense with regard to providing firm bids for contracts for projects that may not begin construction for more than three months from the time the proposal is submitted. Under those circumstances, the roofing contractor faces additional exposure to the increase in the cost of labor and materials. Therefore, estimating those jobs appropriately can make or break a roofing contractor.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

By Trent Cotney for RoofersCoffeeShop.com
Trenton H. Cotney
Florida Bar Certified Construction Lawyer
Trent Cotney, P.A. 
407 N. Howard Avenue
Suite 100
Tampa, FL 33606

Wednesday, January 11, 2017

Liquidated Damages Provisions in a Construction Contract

Liquidated damages are a fact of life in modern construction contracting. However, even if your contract contains a liquidated damages provision and the owner has assessed liquidated damages, that does not mean the assessment is valid or enforceable. There are a number of ways you might be able to prevent an owner from keeping contract proceeds that are rightfully yours. This article will provide the reader with an idea or two that will help keep hard-earned contract proceeds in the contractor’s pocket.
In a breach of contract situation, liquidated damages are designed to provide a means to compensate the non-breaching party when the actual damages are not readily ascertainable. In other words, when the non-breaching party’s actual damages will be difficult to determine in the event of a breach, then the parties are allowed to stipulate in their contract that a set sum of money will be paid in lieu of having to prove up the actual damages.
In construction contracts, the liquidated damages clause is usually tied to timely completion of the work by the contractor and usually allows the project owner to collect liquidated damages upon late completion. For example, for each day that the work is not complete past an agreed upon date, the contractor will have to pay the owner $x per day. Liquidated damages can be agreed to in any type of contract, and not just construction contracts. In a real estate sales contract, the parties might stipulate in their contract that if the buyer reneges and fails to close, then the seller gets to keep the earnest money deposited by the buyer.
A liquidated damages amount is intended to compensate the owner for the other party’s breach of the contract. If the provision seeks to do anything other than provide reasonable compensation, then the clause is really a penalty, and as such, will not be enforced. Merely because the parties title the provision as a “liquidated damages” provision is not determinative of whether it is really a penalty. Whether a provision is a valid liquidated damages clause or an unenforceable penalty depends on the facts of each case.
For example, if a provision that is labeled “liquidated damages” is not intended to compensate the owner, but is really intended to coerce the contractor into completing the work on time, rather than compensating the owner for delay damages, then the clause is a penalty. Similarly, if at the time the parties entered into the contract, the owner’s actual damages are “reasonably ascertainable,” then there is no reason to stipulate to the liquidated damages amount and it will not be enforced.
Another argument that has succeeded in avoiding an otherwise valid liquidated damages clause is where the liquidated damages amount “shocks the conscience” of the court. In other words, if the stipulated sum is simply too great in comparison to the contract value itself, then the liquidated damages will not be enforced. This analysis compares the stipulated sum with the contract value. For example, in Hook v. Bomar, 320 F.2d 536 (5th Cir. 1968), the loss of a $30,000 deposit on a $95,000 contract was found unconscionable, and the liquidated damages provision was not enforced.
Furthermore, liquidated damages also are not enforceable if the non-breaching party contributed to the other party’s default. In a construction contract setting, if the owner contributed to the delay in the completion of the contract, then the owner is not permitted to assess the daily liquidated damages for those delay days caused or contributed to by the owner.
Liquidated damages tied to completion of the work generally cannot be assessed after the project has reached substantial completion. Liquidated damages are intended to compensate the owner for late completion, and by definition at substantial completion the owner has functional use of the project. Thus, at substantial completion, the owner is no longer incurring damages.
By way of illustration, on a construction project an owner may want $1000/day in liquidated damages to compensate the owner for lost rent and extended project administration for each day the work is not complete. However, once the project is substantially completed, the owner can rent the property, so that portion of the owner’s damages included within the stipulated $1000/day is no longer being incurred. If the owner seeks the entire liquidated damages amount for days after substantial completion until final completion, a strong argument can be made that no post-substantial completion liquidated damages are allowed even if the owner is incurring continued administration costs. The better liquidated damages clause would state that upon substantial completion, the liquidated damages will be reduced to $500/day or some other reasonable figure to compensate the owner for the extended project administration required to obtain final completion of the project.
Owners routinely withhold contract proceeds under the argument that the contractor is liable for liquidated damages. However, even if it appears that the liquidated damages are proper, the prudent contractor will not accept the assessment at face value because there are many ways to defeat a liquidated damages clause. Hopefully, this article will provide the reader with a way to recover the withheld funds.

Author’s note: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.

By Trent Cotney for RoofersCoffeeShop.com
Trenton H. Cotney
Florida Bar Certified Construction Lawyer
Trent Cotney, P.A. 
407 N. Howard Avenue
Suite 100
Tampa, FL 33606