Prevent or Manage Homebuilder & Contractor Disputes - Legal Advice

In this episode of the Your Project Shepherd podcast, host Curtis Lawson is joined by Kenneth Stevens, managing partner at Stevens Reed and Armstrong, to discuss the critical aspects of avoiding disputes in construction projects. They emphasize the importance of detailed contracts, clear communication, and third-party inspections to ensure project success. Stevens highlights the need for transparency in planning, execution, and especially in handling change orders and disputes. They also cover the challenges of contractors taking on projects beyond their capabilities and the risks associated with subcontractors lacking proper insurance or financial stability. Additionally, Stevens shares insights into his venture, PIER Urban Wineries, and the importance of measured growth in entrepreneurship.

• Proper planning is the foundation of a successful construction project.
• The left wall represents the team working on the project.
• Communication is depicted as the right wall.
• Proper execution is symbolized by the roof of the house structure.

"The foundation is proper planning, the left wall is your team, the right wall is communication, and the roof is proper execution."

• This quote outlines the metaphor used to describe the essential elements of a successful construction project. Each component is critical and must be in place for the project to succeed.

• Kenneth Stevens is a principal/managing partner at Stevens, Reed, and Armstrong, focusing on construction litigation.
• The firm is a litigation boutique, dealing with disputes between business entities.
• Different partners in the firm specialize in various areas such as employment issues and general commercial litigation, including breach of contract and partnership disputes.

"So we're a litigation boutique so primarily what we're doing is disputes between business entities... my area is construction litigation primarily litigation and arbitration."

• This quote introduces Kenneth Stevens' role and area of expertise within his law firm, emphasizing their specialization in business disputes, particularly in construction litigation.

• Kenneth Stevens primarily represents contractors in both commercial and residential jobs, on public and private sides.
• His practice is focused on construction litigation, representing 90% contractors.

"I say probably 90% of my practice is representing contractors in both commercial and residential jobs on the public and private side."

• The quote indicates that Kenneth Stevens' legal practice is heavily focused on representing contractors rather than homeowners, showcasing his specialization within the construction industry.

• Kenneth Stevens is recognized for sharing valuable, helpful information on LinkedIn.
• The aim is to post content that is beneficial for contractors, including insights from case experiences and industry trends.
• The impact of these posts is often not immediately apparent, but they can influence contractors to make positive changes, such as updating contracts.

"I try to post stuff that from a construction standpoint you know some people might know... and then sometimes it's just stuff that maybe people don't know."

• This quote reflects Stevens' intention to share knowledge on LinkedIn that could be new or serve as a reminder for contractors, aiming to provide useful information that can improve their business practices.

• Mistakes are inevitable in construction, but accountability is often lacking.
• Addressing issues promptly and owning up to mistakes can prevent costly legal disputes.
• Encouraging contractors and their lawyers to be proactive in resolving issues can save time and resources.

"I think that we are in an era of just you don't ever own up to the mistake and it makes things way more expensive."

• Stevens points out that the reluctance to admit mistakes in the construction industry leads to more expensive and complex legal disputes, suggesting a need for greater accountability.

• Many disputes arise from misunderstandings of the contract by both homeowners and contractors.
• Homeowners, in particular, may not read or fully understand the contracts they sign.
• It is advised that homeowners seek legal counsel to understand significant purchases like homes.

"I think the biggest thing is what I would like to see happen is more people get lawyers you know to just kind of explain it to them plain terms."

• Stevens emphasizes the importance of homeowners seeking legal advice to ensure they understand the terms of their construction contracts, which could prevent future disputes.

• Contractors should ensure they understand their contractual obligations and communicate clearly with homeowners.
• Transparency and clarity about what is being provided and paid for can prevent disputes related to scope and cost.
• Proactive discussions and reviews of contracts can help all parties understand their commitments and responsibilities.

"I think that just more transparency and understanding on the front end, Clarity to make sure that both parties understand this is what I'm paying for... and this is what you're getting."

• Stevens advocates for clear and transparent communication between contractors and homeowners to ensure mutual understanding of the contract, which can mitigate the risk of disputes.

• Concerns arise from lack of accountability in contractual agreements.
• Misrepresentation can lead to claims of fraudulent inducement.
• Fraudulent inducement occurs when one party is led to enter a contract based on false statements or promises.
• Such misrepresentations can void the agreement if proven.

"There's this contractual concept of fraudulent inducement... they fraudulently induced me to enter into this contract by sitting down and saying that Clause one meant this and Clause two this... that voids the agreement."

• This quote explains the concept of fraudulent inducement, where false explanations of contract clauses can lead to the voiding of the contract if such misrepresentations are the reason for signing.

• Contractors must ensure clients understand contract terms.
• Having conversations documented in writing, especially regarding substantial completion, is critical.
• Clear documentation helps avoid allegations of misrepresentation and subsequent legal claims.

"I think you do have to be very careful... to just be surface level... follow up that conversation with documentation of what you've explained."

• The quote emphasizes the need for contractors to document discussions and explanations provided to clients to prevent misunderstandings and legal issues.

• Specifications are vital as they outline what is provided for the payment.
• It's important for clients to review and ensure all expected items are listed in the contract.
• A detailed scope document prevents disputes by clarifying what is included and what is not.

"The specifications document is... the most important one in there because that outlines what I am giving you for what you're paying."

• The quote highlights the significance of the specifications document in detailing the exact scope of work and materials included in the contract.

• Contracts should have explicit exclusion clauses stating that anything not listed is not included.
• Both contractors and clients must be accountable for what is agreed upon in the contract.
• Detailed contracts with clear exclusions help avoid disputes over inferred items.

"Anything that's not on here is specifically excluded... courts have made it very clear that if you expressly exclude anything not included in the document."

• This quote points out that clearly stating exclusions within a contract helps legally protect against assumptions about what is included, reducing the room for disputes.

• Lack of detail and general descriptions in contracts can lead to different interpretations and disputes.
• It's crucial to have candid conversations to ensure both parties share the same understanding of contract terms.
• Contractors should focus on what is specifically outlined in the scope document.

"These generalities are bound to cause problems... anytime you just have a general description or lack of a description, there just leaves room for two people to have differing interpretations."

• The quote stresses that general or vague descriptions in contracts can cause misunderstandings and disputes, emphasizing the need for detailed and specific terms.

• Contractors must be prepared for unforeseen circumstances that may increase costs.
• Change orders are a common occurrence and must be managed transparently and fairly.
• Clients should be aware that certain changes or additional work may incur extra costs.

"We find out we got to do some additional saw cutting... significant change order... that could have been anticipated."

• The quote illustrates the reality of unexpected changes in construction projects that lead to additional costs, highlighting the importance of clear communication about such possibilities in contracts.

• Detailed contracts with clear specifications prevent misunderstandings and disputes.
• Contractors should ensure that the client has a clear understanding of what they are purchasing.
• Transparency and detail in the contract can save both parties time and legal expenses.

"Having a high level of clarity and Detail in your documents is really important."

• This quote underscores the importance of clarity and detail in construction contracts to prevent disputes and misunderstandings.

• Overpromising on cost and time can lead to significant issues in construction projects.
• Contractors should avoid commitments they may not be able to fulfill.
• Realistic expectations should be set from the beginning to prevent future conflicts.

"I see so many contractors saying... we'll do that for you... when it comes time to execute it they can't execute it."

• The quote warns against the common issue of contractors overpromising capabilities or results they cannot deliver, which can lead to disputes and dissatisfaction.

• Contractors should not take on projects that exceed their qualifications and experience.
• Overconfidence in abilities can lead to poor execution and legal complications.
• It's important to recognize and work within one's capabilities to ensure project success.

"People taking on a bigger project than they're really qualified to take on... that kind of overpromising... nightmare."

• This quote reflects the risks associated with contractors taking on projects that are beyond their expertise, often resulting in project failure and legal disputes.

• Construction subcontractors often jump into large projects without adequate capital.
• They may not have the financial stability to wait for payment, which can be delayed for 30-45 days.
• This lack of capital can lead to financial strain and inability to complete the project, affecting all parties involved.
• Subcontractors may be technically capable but lack the business infrastructure to handle the financial aspects of large projects.

"A big part of what I'm seeing is just they're undercapitalized. They're not in a position to do this large of a project and then go 30 45 days without getting paid like they need that money almost immediately."

• This quote emphasizes the financial challenges subcontractors face when they lack the necessary capital to sustain operations during the payment waiting period.

• Rapid or hyper growth in business can be detrimental if not managed properly.
• Entrepreneurial ventures require cautious and measured growth to avoid overextension.
• Companies must assess opportunities and recognize when a project is beyond their current capabilities.
• The speaker, Kenneth, shares personal experiences of growth in his businesses and the importance of accountability.

"Growth is good, hyper growth terrifying. You grow too quickly it can kill you, it can kill your business."

• Kenneth warns of the dangers of hyper growth, suggesting that while growth is essential, it must be controlled and sustainable.

• Subcontractors and general contractors (GCs) may lack credit terms with suppliers, leading to immediate cash requirements.
• The construction industry often has payment structures that differ from residential to commercial projects.
• Regular and timely communication about financial expectations and payment schedules is crucial to prevent disputes and financial strain.

"Maybe he doesn't have credit terms at his suppliers and or maybe the GC doesn't have credit terms with these suppliers and so they have to write that check every single week."

• The quote highlights the challenges subcontractors face when they do not have credit terms with suppliers, requiring them to pay out of pocket regularly.

• The speaker, Curtis, describes how his business was affected by Hurricane Harvey.
• He expanded his staff and workload to capitalize on the increased demand but lacked the organizational structure to manage the growth effectively.
• As a result, the business made less profit despite doubling the workload, and staff had to be let go once the demand subsided.

"We did not have the level of organization to maintain that. And we actually made less money doing double the work."

• Curtis reflects on the consequences of rapid expansion without adequate preparation, leading to inefficiencies and reduced profitability.

• Change orders can be a source of conflict due to miscommunication or misunderstandings about additional costs.
• There are two types of change orders: necessity (due to unforeseen conditions or errors) and preference (client requests for alterations).
• Contractors should clearly communicate and obtain approval for change orders before proceeding with the work.

"If there's a change order you've got to stop what you're doing, write it up, assign a cost to it, and present it to the client."

• This quote underlines the proper protocol for handling change orders, which includes stopping work, documenting the change, and getting client approval to prevent disputes.

• Lack of communication is a major cause of conflict in construction projects.
• Contractors may hesitate to share bad news, but delaying communication can exacerbate issues.
• Transparency and accountability are key; contractors should inform clients of issues promptly and provide solutions.

"The bad news doesn't get better with age. You got to just pull the Band-Aid off."

• Kenneth emphasizes the need to communicate issues immediately, as delaying can lead to more significant problems, similar to how ignoring a disease can have severe consequences.

• Kenneth shares his experience with his winery business, PIR Urban Wineries.
• Rapid expansion of product offerings can lead to inventory management challenges.
• Learning from mistakes and being accountable for business decisions is crucial for long-term success.

"We grew our product offerings very quickly... very quickly I was like this is very difficult to maintain."

• Kenneth reflects on the lessons learned from expanding his winery's product line too quickly, leading to inventory challenges.

• PIR Urban Wineries is expanding to a new location in Dallas, which is currently under construction.
• The expansion is based on market demand and analytics, indicating a strong customer base from Dallas.
• Proper planning and management are essential for successful business expansion.

"We got a good group up there, and our GM's kind of managing that up there as well, which is nice."

• The quote illustrates the importance of having a competent management team to oversee new business ventures and expansions.

• New law stipulates that contractors are not obligated to perform work if there's a significant change without an executed change order.
• Previously, contractors could be pressured to undertake additional work with the promise of future compensation.
• This change is designed to protect contractors from being forced into unagreed work.

"Interesting, they got that law now that you know if the change order is over a certain amount, I mean if there's a change in the work over a certain amount without an executed change order, the contractor doesn't have to perform the work."

• The quote highlights the legal protection for contractors against performing unapproved additional work due to a change in project scope without an executed change order.

• Third-party verification and inspections are means to protect both contractors and homeowners and avoid disputes.
• Builders and contractors often avoid inspections as they hold them accountable to the agreed plans.
• Having a neutral third party verify the work offers protection against future claims by homeowners.

"It's kind of a way to protect yourself and avoid disputes... using third-party verification and inspections to protect yourself and the homeowner and avoid disputes."

• This quote emphasizes the importance of third-party verification and inspections as a protective measure against future disputes for both contractors and homeowners.

• Inspections by architects, structural engineers, and other inspectors ensure work adheres to plans and specifications.
• City inspectors focus on building codes and may not catch all issues or inspect for fit and finish or adherence to plans.
• Hiring third-party inspectors provides additional assurance that the work meets specifications and codes.

"If there's an architect, a structural engineer, and then various types of inspectors out there... it definitely makes it a lot more difficult for a homeowner to bring a claim."

• The quote suggests that the involvement of professional inspectors makes it harder for homeowners to make successful claims against contractors, as the work has been verified by experts.

• The cost of third-party inspections is relatively small compared to the overall project cost.
• Investing in inspections can save money in the long term by ensuring quality and compliance.
• Contractors can build the cost of inspections into their pricing to protect their margins.

"The architect doing CA might charge a few thousand dollars... you're spending a couple million bucks, probably should go ahead and spend $5 or $10,000 to do all the checks along the way."

• This quote discusses the cost-benefit of spending on inspections relative to the total project cost, highlighting the importance of ensuring quality for long-term protection.

• Contractors should structure subcontracts to protect themselves, such as withholding a final payment until work is verified.
• Detailed agreements with subcontractors prevent misunderstandings and ensure clear expectations.
• Master Service Agreements (MSAs) can streamline the process for recurring work with subcontractors.

"Don't give your framer the last 10% of his draw until it's been signed off on by the engineer... you can build a framework, you know, the contractual framework to make sure that it doesn't impact you much at all."

• This quote advises contractors to withhold a portion of the payment until work is approved, ensuring subcontractors complete the job as specified.

• Being specific in subcontracts with details and specifications avoids disputes and ensures expectations are met.
• It is crucial to have written agreements rather than relying on verbal agreements or informal communications.
• MSAs provide a comprehensive agreement that can be referred to for each job, simplifying the process of issuing work orders.

"When a contractor executes a subcontract with his plumber, be very specific in what that guy is supposed to do... you got to have agreements in place."

• The quote stresses the necessity of having detailed and specific written agreements with subcontractors to avoid future issues and ensure clarity of responsibilities.

• Ensuring subcontractors have insurance is vital for risk management.
• Contractors should understand the exclusions in the insurance policies of their subcontractors.
• Adequate insurance protects against the inability to collect on judgments or arbitration awards.

"You want to make sure that the sub has not only that the sub has insurance but you understand what the exclusions are and to the extent that you're able to, you get some of those exclusions eliminated."

• The quote highlights the importance of understanding and managing the insurance coverage of subcontractors to ensure protection against defective work and financial risks.

• The advice discussed applies to both contractor-homeowner and contractor-subcontractor relationships.
• Contractors should be clear and specific in their expectations and agreements from the start.
• Proper documentation and insurance are necessary to mitigate risks and ensure successful project completion and financial protection.

"I think all the things that we're talking about, even though we've been talking about it in relation with contractors and homeowners, the same advice goes to contractors dealing with their subcontractors."

• This concluding quote reiterates that the principles of clear agreements, third-party verification, and risk management are universally applicable in the construction industry, both for homeowner contracts and subcontractor relations.