Damages When the Contractor is not Paid

Contractors run into problems when they advance money for custom materials or do a great deal of work on a project without receiving payment from the homeowner. The best way for a contractor to avoid getting "burned" is to start with a good contract. If the homeowner breaches the contract and refuses to allow the contractor back to complete the work, the contractor is entitled to the value of the work done to date. He or she may also be able to claim lost profits if it is found the the homeowner has unlawfully terminated the contract.

Unless the contractor has provisions in his contract entitling him to attorney's fees, interest and/or costs, the contractor will not be able to collect for those items.

Contractors may incur other damages that are caused by the homeowner. If the homeowner delays in making decisions, or acquiring materials, he or she can cost the contractor money as a result of the delays. In addition, homeowners may bring other independent contractors onto the site who interfere with the contractor's work.

However, if contractors do not allow for these kinds of damages in their contracts, they will not be able to recover their losses.

A good contract will include progress payments as work is completed, along with advances for custom items. The contractor and the homeowner will sign off on each phase as it is completed so there is no misunderstanding about payments and what they cover.

All change orders will be in writing and initialed by both parties, and they will be billed as each change order is finished as well.

For the contractor, available damages are limited unless they are provided for in the contract. That is why it is so important for a contractor to put in the time and effort to create a good contract and protect himself from forseeable problems.

What are a Homeowner's Possible Damages against a Home Contractor?

What are the damages that can be recovered by a homeowner when a home contractor fails to complete the job, or does the work improperly? The damages depend on the claims that are brought against the contractor.

Typical damages include:

Breach of contract - The homeowner has a duty to mitigate (reduce) his damages in a reasonable fashion, but may sue for the amount of money that it takes to complete the work, minus any money that was held back from the contract.

The homeowner may also collect for moneys paid to do corrective work beyond the contract price.

Under some state statutes, the homeowner may collect up to double or triple damages, attorney's fees and costs (filing fees, etc.). The doubling or tripling of damages is usually awarded when there have been unfair and/or deceptive practices, or extreme negligence by the contractor.

These damages are "punitive" in nature, in that the double or triple damages are the punishment.

Consequential damages, lost time from work for example, are not available unless the contract provides for them.

Delay damages are also not available unless provided for in the contract.

When drafting the contract, both sides should think about possible damages, and whether they want to allow for them if a conflict occurs.

Why I am a Litigator Who Tries not to Litigate

It may sound bizarre to say that I try not to litigate cases, but for most clients, going through litigation is incredibly stressful and expensive. Even if they have the right to recover their attorney's fees if they win their suit, these are not guaranteed, and recovery may be difficult.

Settling disputes is usually preferable for a number of reasons:

1. Parties are more likely to comply with agreements that they create, as opposed to a decision handed down by a judge (studies have shown this).

2. Litigation can take years, and money now is frequently better than money later.

3. Even if one obtains a judgment, it may not be collectible.

4. Dragging out a dispute through litigation means it stays a part of your life for a very long time.

5. I have lost cases I should have won, and vice-versa.

6. Litigating a case can be like playing the lottery.

That said, one should not start a case without being prepared to see it through. Clients need to know that there is frequently a flurry of activity in the beginning when a chunk of money is expended, then discovery (the exchange of information and documents) takes place and can be quite costly (a deposition alone can cost over a thousand dollars), and finally, there is extensive preparation for trial.

There may also be numerous motions along the way (for real estate attachments, to eliminate evidence, etc.). Clients often do not understand the amount of time and effort it takes to prepare these motions and are shocked by the price tag.

My approach to a claim is to break it down into phases and re-evaluate on a regular basis. A simple demand letter and the response can say a lot about how a case is going to proceed.

When clients want me to "go for the jugular," I will, but unfortunately, there are few who are willing to fund such an endeavor. In fact, the clients who are frequently the most agressive, or who make decisions based on their emotions, are the ones who do not want to pay legal fees.

So, if you do end up in a dispute, ask your lawyer for an overall assessment of the process and the potential for recovery. Find out about the cost for each stage of the process. Do not get so caught up in the principle that you lose sight of the possible results. After all, most claims come down to money, and for that reason, decisions should be made on an economic basis.

The Difficult Contractor

The Difficult Contractor


Please excuse the delay in posting. The last few weeks have been quite busy. In a recent post I discussed how to deal with difficult homeowners. Now it is time to focus on the difficult contractor. What kinds of actions do contractors take that make life difficult for the homeowner?

The first action is actually the opposite. The most common problem for homeowners is the contractor’s failure to show up at the work site on a regular basis. Jobs that are scheduled to be completed within a certain amount of time end up getting dragged out, and the homeowners despair as their home remains a construction site. The contractor has not abandoned the job, so the homeowner cannot claim that the contract has been terminated, but the work is taking forever. What can a homeowner do?

First, this problem must be addressed in the contract itself. There should be a provision that states that the contractor will be on site for a number of days or hours per week. If the contractor does not follow this schedule for a certain number of weeks, there should be penalties built in, or a point where the contract has been breached, and the homeowner may hire another contractor to complete the job and mitigate damages.

If the contract does not address this issue, the homeowner should schedule an appointment to meet with the contractor and write a revised schedule that is agreed to and signed by both sides. It ought to address the issues that are listed above for the original contract.

If the contractor will not meet with the homeowner, then the homeowner should send a demand letter with a proposed schedule. The homeowner may invite the contractor to submit a counter proposal. If the contractor fails to respond, the homeowner must state a date by which the contractor will be deemed in breach, and then the homeowner may hire another company to finish the job.

When a contractor fails to show up, the homeowner feels helpless. The procedures described above help the homeowner regain control over the job. After all, it’s his or her house.

The next post will be The Difficult Contractor – Part 2.

Thoughts on The Big Dig Disaster

As many of you may realize, I live in Massachusetts, where we have been facing the reality of The Big Dig for a very long time. For those of you who are not familiar with The Big Dig, it was the world's most expensive construction project (it may still be), and the plan was to submerge a raised highway that divided Boston, put in tunnels and connectors, etc. Given that Boston is one of the oldest cities in the United States, the traffic has greatly outgrown the layout of the city, and the bottlenecks through downtown can be quite bad.

So, for Bostonians, The Big Dig seemed like a great idea. The problem is, the cost has greatly exceeded the budget (See this 2003 article for some figures: http://www.csmonitor.com/2003/1219/p02s01-ussc.html) and now we have been faced with serious safety issues as well. After the fatal accident in which a woman was killed when a concrete ceiling tile fell, residents have been affected by the closing of the connector tunnel to the airport. We have been told that other tunnels may be unsafe as a result of the epoxy used to glue the bolts in. We have learned that there had been warnings about these unsafe conditions that were not taken seriously enough.

Prior to this, a group was appointed to investigate cost overruns on the project and to evaluate how to go about recovering funds that were billed excessively, or incorrectly reported change orders. The problem is, the group that was doing this work was physically sharing space with Bechtel Parsons, the main construction company on the project. I saw it with my own eyes, because I interviewed for the job, and we had to whisper when discussing the cost recovery process. There was some noise from the legislature about establishing a separate group, but that never transpired.

The only solution is for the government to establish a truly independent tribunal of industry experts, government officials and private citizens who will not gain any benefit from their findings. The project should first be evaluated for safety. I drive through those areas frequently, and we need to be reassured that our highways and tunnels are safe.

Then, that same body should investigate the financial aspects of the project and really proceed with the cost recovery process. The Big Dig was not "all bad." I heard Larry Delmore give a speech about the Dispute Resolution Boards that were established to deal with problems as they arose, and the DRBs saved enormous sums by preventing problems from escalating and ending up in litigation. You can learn more about his foundation at http://www.drb.org.

If some of you are surprised that I am posting about The Big Dig, you should know that I also practice contruction law, and therefore have an interest in public construction projects. I will still focus on home contractor-homeowner issues, but thought it would be interesting to have a discussion about this important topic.

What to do When the Contractor has been Paid in Full

Someone recently googled the keywords listed in the title, alerting me to the fact that when one has lost the leverage of the final payment, the homeowner is frequently at wit's end. Many homeowners end up kicking themselves when a contractor abandons a job, or ignores the final punchlist once payment has been made. What is a homeowner to do?

First of all, understand that you are not alone. Many bright, intelligent people make the final payment for a variety of reasons.

Two, make a game plan. If there is work that still needs to be done, or punchlist items that have been ignored, send the contractor a demand letter outlining the work and proposing a schedule for completion. Tell him or her that s/he has x days to respond with a reasonable proposal (offer of settlement), or you will take further action.

In Massachusetts, under the Consumer Protection Act, one is required to write a 30-day demand letter in order to pursue a claim that may ultimately pay double or treble damages, attorney's fees, interest and costs.

If the contractor responds, then write up an agreement that will build in consequences if he fails to follow through.

If the contractor does not answer, request the help of the building inspector, office of consumer affairs for your state, Better Business Bureau, or the agency that regulates contractors.

If all else fails, you may enlist the help of an attorney. Taking action will remove that feeling of helplessness and hopefully move the project forward to a successful result.