This summer promises to be a busy one for local construction projects. Commercial and residential projects are rapidly increasing in number. And, regardless of whether you are involved in a large commercial project, or looking to update or build a new home, the following practical tips and information will give you confidence when reviewing and developing a solid construction contract.
1. Picking a contractor.
Before you get to the contract stage, you have to pick the contractor. Have you used a certain contractor before and been pleased with the result? Does that trusted contractor do the type of work you need done? Or, if not, can a trusted contractor give you a referral? You can also ask neighbors, co-workers and other business contacts for referrals.
2. Contractor licensing.
The Minnesota Department of Labor and Industry is responsible for licensing Minnesota residential building contractors. Hiring a licensed contractor in Minnesota ensures that the company has met standards that include continuing education and maintenance of proper liability insurance.
Importantly, hiring a licensed contractor in Minnesota may also allow access to Minnesota’s Contractor’s Recovery Fund. The Fund is a statutory safeguard that compensates owners who have suffered losses due to a licensed residential contractor’s fraudulent, deceptive, or dishonest practices, conversion of funds or failure to perform. The Minnesota Department of Labor administers the Fund, and can provide guidance on a claim.
In Wisconsin, contractors must have proper state contractor credentials. The status of a builder’s credentials can be obtained by contacting the Wisconsin Department of Commerce. Wisconsin does not have licensing reciprocity with Minnesota.
3. What general terms should be in a construction contract?
There should be a written contract for any construction project. Generally, the contract should cover the cost, scope and timing of the project. And, if the scope may change during the course of the project, the contract should cover the process for written change orders. It’s advisable that both parties agree in writing to a change order and any additional cost before change order work is done. The goal is to increase communication and reduce potential disputes.
The contract should also cover insurance. Does the contractor have insurance? If so, what is the scope of the coverage, and who or what is covered? Is the owner named as an additional insured under a policy for the project?
The parties should spell out the start and end date for the project. And, if the project cannot be finished on time, the parties should outline how that time frame is to be modified, and whether there will be penalties.
4. Minnesota Statutes require certain contractual terms for residential construction.
Minnesota Statutes require specific contractual provisions related to construction warranties and dispute resolution for residential projects. Under Minnesota Statutes section 327A.08, the warranties required by sections 327A.01 to 327A.08 (described below) must be set forth as written warranty instruments that are to be included as part of the construction contract. In addition, statutory warranty exclusions under Minnesota Statutes section 327A.03, the right to inspect and offer to repair framework outlined in Minnesota Statutes section 327A.02, subdivisions 4 and 5, and the home warranty dispute resolution process under section 327A.051 (also described below) must all be conveyed in writing to the residential owner.
5. Statutory construction warranties for residential construction.
Minnesota Statutes Chapter 327A provides warranties that cover essentially any new dwelling or major home improvement project.
With regard to new home construction, the warranty period begins from the statutory “warranty date” (typically established by a “certificate of occupancy” from an inspecting authority), or from the date on which the initial owner takes title to the home. The warranty period depends on the type of defect for which warranty repairs may be required. The builder must warrant that during a one-year period the dwelling shall be free from defects caused by faulty workmanship and defective materials due to noncompliance with building standards. There is a two-year warranty that covers defects caused by faulty installation of plumbing, electrical, heating, and cooling systems due to noncompliance with building standards. And, there is a ten-year coverage period that warrants that the dwelling shall be free from major construction defects. According to statute, a “major construction defect” is actual damage to the load-bearing portions of a dwelling which affect, or are likely to affect, the use of the dwelling for residential purposes.
In addition to new home warranties, Minnesota Statutes also cover home improvement work involving major structural changes or additions to a residential building. The home improvement warranty periods essentially mirror those covering newly constructed homes. There is a one-year period for defects caused by faulty workmanship and defective materials, a two-year period covering the installation of plumbing, electrical, heating and cooling systems, and a ten-year period covering major construction defects.
6. Statutory dispute resolution.
The Minnesota legislature enacted a home warranty dispute resolution process. Homeowners and builders or home improvement contractors are required to employ the process before a homeowner warranty dispute may proceed to litigation under Minnesota Statutes Chapter 327A (unless the parties agree to use an alternative dispute resolution mechanism). The dispute resolution process is administered by the Minnesota Department of Labor and Industry.
7. Forbidden contractual terms – indemnification in Minnesota construction contracts.
An indemnification agreement is an agreement that provides that one party bear the monetary costs, either directly or by reimbursement, for losses incurred by a second party. Simply, it is “risk-shifting.” In a construction setting, a general contractor may demand that a sub-contractor agree to “indemnify” the general contractor for damages caused by the actions of the sub-contractor.
For many years, in Minnesota, risk-shifting agreements in construction contracts that require a first party to indemnify another from that other’s own negligent or wrongful acts were prohibited. However, there was an exception to this general prohibition that allowed contracting parties to obtain insurance for the benefit of one another. So, until recently, a general contractor could contractually require a sub-contractor to obtain insurance indemnifying the general contractor for the general contractor’s own negligence. As of last summer, however, a statutory change to Minnesota Statutes Section 337.05 appears to forbid such agreements. Therefore, any contract that contains a contractual indemnity section should be reviewed for compliance with current Minnesota law.
Whether commercial or residential, successful construction projects start with proper and timely communication. The construction contract is the most important communication and memorial of the parties’ expectations and responsibilities. Choosing a responsible contractor, understanding the parties’ expectations and responsibilities, and ironing out the details in a written contract that complies with all aspects of the law will go a long way toward ensuring a successful project.
Matt Hanka is an attorney at the law firm of Fryberger, Buchanan, Smith and Frederick, P.A. concentrating his practice in the areas of civil litigation, construction, land use and administrative law. Matt can be reached at (218) 725-6815.