Monthly Archives: February 2017

The Texas Residential Construction Liability Act and Its Benefits to General Contractors: Part 1

If you’ve been building long enough, you know that every project comes with its challenges. Whether it’s unforeseen additional work requiring a change order or project delays due to material shortages, there is typically a fire to put out. Unfortunately, when it comes to residential construction defects, many challenges progress into full blown disputes that are eventually litigated.

Texas Residential Construction Liability Act

Chapter 27 of the Texas Property code is known as the Texas Residential Construction Law Act (RCLA). The RCLA was enacted in 1989 in response to a growing trend of favorable verdicts for homeowners when pursuing claims against contractors for defects.  The act is applicable to:

  • any action to recover damages or other relief arising from a construction defect, except a claim for personal injury, survival, or wrongful death or for damage to goods; and
  • any subsequent purchaser of a residence who files a claim against a contractor. Prop. Code § 27.002

The act requires the homeowner to take certain procedural steps before pursuing litigation against a contractor. In the past, homeowners have tried to bypass these requirements by alleging that the contractor responsible for the alleged defect is not a “contractor” as is defined by the statute. Fortunately, the act defines a contractor as follows:

any person contracting with an owner for the construction or sale of a new residence constructed by that person or of an alteration of or addition to an existing residence, repair of a new or existing residence, or construction, sale, alteration, addition, or repair of an appurtenance to a new or existing residence. Tex. Prop. Code Ann. §27.001(5)

As you can see, this definition is broad and covers nearly every possible person working on a residential project.

Owners have also tried to circumvent the requirements of the RCLA by alleging that the dispute is not as a result of a construction “defect” as is defined by the statute. However, defect is also defined by the act as:

a matter concerning the design, construction, or repair … of an alteration of or repair … to an existing residence … on which a person has a complaint against a contractor.” Tex. Prop. Code Ann. §27.001(4)

Again, the definition acts as a catch all definition concerning residential construction complaints. Given the broad definitions and applicability, it is very likely that if a contractor is sued by a homeowner concerning a residential project, the action falls under the RCLA. In part 2 of this series you will see why this benefits you as a contractor.

Nothing here is intended to be legal advice nor should it be construed as such. If you have questions or would like to discuss an issue with your company, please call 832-930-0529 or visit http://www.StephensBell.com

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Using a Cost-Plus Contract? Here’s How to Avoid Litigation

There are a number of different  construction contracts used by general contractors. The differences in the contract are usually predicated on the type of project and the obligations of the parties. One construction contract that has become popular is the cost-plus contract.

In a cost-plus contract, the buyer pays the contractor for the cost of the materials and labor used to complete the project. A contractor’s fee is also charged to the buyer or developer on top of the costs and is usually calculated as a percentage of the total amount of the labor and materials. For example, if a home cost $100,000.00 to build. The general contractor may elect to charge a fee of 10% of cost and bring the total price of the project to $110,000.00.

As you can see, in a typical cost-plus contract, the more expensive the project the more money the general contractor makes.  It is for this reason that buyers and developers are becoming less comfortable with these agreements and more cost-plus contracts are becoming the subject of litigation. Contractors using these contracts needs to be prepared to litigate them and this is not always an easy task.

In cost-plus contract litigation, the developer typically alleges that the contractor reported inflated costs to inflate its fee or the contractor failed to act as a reasonable contractor in controlling cost on the project. A contractor can place themselves in a position to contest these allegations by following a few simple rules.

Get Approval

One way to be proactive and create a defense to allegations of cost inflation or failure to control costs is to require written approval from the developer or buyer for anything on the project that is more expensive than originally estimated. Make sure that the developer acknowledges that there is an increase in cost; that they have seen reasonable documentation confirming the increase in costs; that they do not want the contractor to seek a less expensive alternative; and they approve the work to be performed despite the increase in cost. This will make it very difficult for a developer or buyer to allege a lack of effort in controlling costs.

Explain Your Actions In Detail

It is important that contractors remember that buyers, developers, and contractors are sometimes on different frequencies. The buyer is simply looking to keep costs down so that they can get a good deal on the property and the developer is looking to keep costs down to increase profit margins when the property is sold.  Meanwhile, the contractor must concern its self with warranties and the meeting of certain statutory regulations because ultimately it is the contractor that will be liable for violating the law. Due to the need to comply with certain regulations and provide the best overall product, sometimes the contractor may elect to take an action that increases costs. In this scenario the costs should been agreed to by the developer. It is also important to explain to the developer why costs are increasing.

For example, assume a residential property is being built in an area and the price of the project is estimated at $5,000,000.00 with $500,000.00 allocated to the foundation. After running some tests, the general contractor realizes that the soil makes the home more prone foundational problems and as a result, it wishes to use the best foundation firm in town at a price of $250,000.00 more than the original foundation estimate. A simple written explanation to the owner and a written acknowledgment of the owner’s understanding would be very helpful in a litigation situation.

Be Diligent In Your Accounting

In a claim of fraud against a contractor due to an allegation of falsely reporting costs on a project, the easiest way to defeat the claim is to keep accurate accounting figures and maintain strict documentation to support the numbers. When working on a cost-plus contract, all receipts, check copies, invoices, and related documents should be filed and well maintained. Your ability to be completely transparent with the buyer or developer will help keep you from being a party to a fraud claim.

Nothing here is intended to be legal advice. If you are facing a construction issue and need representation information, visit our website http://www.StephensBell.com; call 832 930 0529; or email us at info@stephensbell.com

Contractor Protection Beyond SOL

If you’re a construction professional in Texas you’ve probably heard the term SOL or “Statute of Limitation”. For those that have not, Statutes of limitation are laws creating time limits for plaintiffs to bring suit against defendants for various reasons. The statutes generally differ depending on cause of action forming the basis for the suit. For example, generally injury claims must be brought within two years of the discovery of the injury while breach of contract claims are allowed within four years of the breach.

However, what is less commonly mentioned in the construction space is the statute of repose. Tex. Civ. Prac. & Rem. Code Ann. §§ 16.008 and 16.009 bar actions against persons who either design or make improvements to real property, unless brought within 10 years. The sections apply to suits for injury, damage, or loss to real property and to suits for personal injury.

Why is any of this important? Well, with a statute of repose, the time period begins running when the improvement is substantially completed rather than when a cause of action accrues. See Tumminello v. U.S. Home Corp., 801 S.W.2d 186, 187-88 (Tex. App.–Houston [1st Dist.] 1990, writ denied). Therefore, a statute of repose can cut off a right of action before an injured party discovers or reasonably should have discovered the defect or injury. Johnson v. City of Fort Worth, 774 S.W.2d 653, 654 n.1 (Tex. 1989) (per curiam). What this means is that even though a potential party’s statute of limitation has not expired because they have not discovered their injury, if the work causing the injury has been completed for 10 or more years, the claim is likely to be barred.

This is why it is important to accurately document the work being completed on every project. Documentation of each individual subcontractor’s substantial completion of their work can offer protection against a later suit. It is good practice for every contractor to keep these records and store them as they could great evidence to prevent future problems.

Nothing here is to be considered legal advice. If you are in the midst of a construction dispute you may want to consider giving us a call at 832-930-0529 or visiting http://www.StephensBell.com