Small-scale residential construction projects, such as single-family home builds, additions, and remodels, pose unique challenges for Wisconsin attorneys who draft construction contracts.
Wisconsin law protects Wisconsin homeowners from being taken advantage of by contractors, by imposing special requirements on contractors who perform residential home improvement work. Contractors can comply with most of Wisconsin’s technical obligations by drafting robust contracts.
In addition, residential construction projects involve different issues and complications than those that arise on larger commercial construction projects. On residential jobs, Wisconsin construction attorneys need to consider not only Wisconsin’s technical legal requirements, but also the unique nature of each individual residential project to assess its contractual needs.
Contractors must take responsibility for getting contracts right because homeowners are often inexperienced when it comes to construction. Building a new home or addition can be a once-in-a-lifetime project for many homeowners.
Strong residential construction contracts detail the rights and responsibilities of each party to the agreement, anticipate common issues that arise on these types of projects, and prevent avoidable disputes.
Unique Challenges with Residential Construction Contracts
Homeowner Involvement. When drafting residential construction agreements, attorneys must account for homeowners being heavily involved in the project and frequently on-site. A new build is exciting, and homeowners will want to walk through the project to see how their new home is coming together.
On an addition or remodel project, the homeowner typically will be living in the home and present at the job site daily. This results in many more casual conversations between the homeowner and the contractor (and even subcontractors) about whether certain changes can be made. This can create tension on the project, as the contractor has planned the schedule and cost based on the existing plans and allowances, and the homeowner may want changes or upgrades not previously discussed.
On a typical residential job, homeowners will make many design or specification decisions after the contract is signed. Therefore, residential construction contracts need to anticipate a flexible timeline, delays, unexpected homeowner purchases, and shifting allowances. Contractors will also need to anticipate changes to scope and the total contract price.
Issues with changes to the scope of work and increased costs is where most disputes arise. Sometimes unexpected issues or crucial upgrades necessitate change orders. When this happens, homeowners often direct changes or approve changes to contractors orally and casually, while both parties are on the job site. This poses a serious risk of parties misunderstanding each other in terms of the scope of a change and the impact on the project cost.
Wisconsin’s Home Improvement Practices Act. In addition to homeowner involvement, Wisconsin Administrative Code § ATCP Ch. 110 – the Home Improvement Practices Act (HIPA) – is another unique challenge to account for when drafting a residential construction agreement.
HIPA is designed to protect Wisconsin homeowners’ contracting for construction services and, notably, provides double damages, attorneys’ fees, and personal liability for violations of its requirements.
Many of HIPA’s requirements involve putting things in writing, including contracts, change orders, and delay notices.1 Many of HIPA’s prohibitions involve avoiding actions that could be considered misrepresentations under the Act, including representations related to the products or materials to be used on the project and representations concerning the price and financing on the project.2
Attorneys drafting construction contracts should review HIPA’s requirements to ensure a contractor’s compliance with Wisconsin law. Doing so not only protects the contractor from easily avoided claims, it also protects the homeowner by facilitating clear communication with the contractor.
What to Include in a Wisconsin Residential Construction Contract
Residential construction contracts come in many forms, and tend to lack the specificity of the standard AIA or ConsensusDocs contracts used on commercial projects.
Attorneys drafting residential construction contracts should consider including the following provisions to best protect the interests of both contractors and homeowners:
Lien Rights. Wisconsin lien law is very technical, and failure to provide a lien notice at the beginning of a project may bar a contractor from asserting lien rights if a homeowner does not pay. Although lien notices may be given in a separate document, it is a good practice to include lien notices in the residential construction contract to help contractors preserve their lien rights.
Subject to limited exceptions, lien notices must be given by general contractors (or prime contractors) who contract with property owners for improvements to the owner’s property and who have engaged or will engage subcontractors, suppliers, or service providers to perform furnish, or procure labor, services, materials, plans, or specifications for the project.3
The notice must be in at least 8-point bold type, if printed, or in capital letters, if typewritten. The notice language is provided in Wis. Stat. section 779.02(2)(a).
HIPA Notices. Prior to entering into a home improvement contract, HIPA requires contractors provide notice to homeowners that homeowners may request lien waivers at the time any payment is made.4 The required, verbatim language is included in Wis. Admin. Code § ATCP 110.025(1)(a).
Although the notice is required to be provided in a separate document, the contractor can satisfy HIPA’s requirement that it retain evidence of the homeowner’s acknowledgment of receipt of the notice by including a signature line in the construction contract for that purpose.
Right to Cure. Contractors must provide customers notice, at the time of contracting, that describes Wisconsin’s Right to Cure laws, which govern disputes between contractor and homeowners and future claims about construction defects.5 The language of the notice is provided in Wis. Stat. section 101.148(2)(a). Oftentimes this notice is provided via a separate brochure. However, including the notice in the contract itself avoids the contractor potentially forgetting to provide the notice.
Wisconsin’s Right to Cure laws provide timetables and steps to help avoid lawsuits between homeowners and contractors.6 By giving this notice, the contractor ensures that it will be able to avail itself of Wisconsin’s Right to Cure laws and potentially avoid a lawsuit altogether.
Delays. Residential construction can be subject to many unforeseen delays. Attorneys should include provisions in the construction contract to provide protection for delays outside of the contractor’s control, such as, weather, material shortages, or late deliveries, government action, or a public health crisis. This provision should also include delays caused by homeowners not providing written approval for allowances, specifications, or change orders needed to progress the project.
Allowances. Attorneys should include in construction contracts as much detail as possible about the type or grade of material that is included in an allowance. Homeowners are often unaware of the cost of various materials and may be expecting granite countertops and wood floors while the contractor has allowed for laminate countertops and engineered flooring.
Payment Procedure and Project Milestones. Contractors should include strict payment procedures and define payment milestones. Payment can be structured many ways, including stipulated sum, cost-plus, or time and materials.
Attorneys drafting construction contracts must carefully consider the appropriate payment structure for a project, to avoid confusion about when payments are due and what work must be done to entitle the contractor to payment. Drafters should also define what constitutes a late payment and the penalties applied to late payments.
Owner Selections. Construction contracts should require owners to sign off on all selections. Doing so avoids having an unhappy homeowner who receive a selection they did not expect. It also protects a contractor from liability for providing the wrong material. The contract also should include language stating that any delays caused by the owner’s failure to timely sign off on selections will automatically extend project deadlines.
Permits. Contracts should specify the party responsible for acquiring and closing out the necessary local government permits for the project.
Plan Approval. Plans are often developed by the design-build contractor, but sometimes an owner supplies the building plans prepared by a separately retained architect. If plans are owner-supplied, then drafters should include language in the contract to safeguard the contractor from liability related to using owner-supplied plans.
Change Orders. Construction contracts should require that all changes be in writing and signed by the owner. In addition, if an owner does not sign a required change order, then the contract should allow for work stoppage.
For example, the contract could state that the owner has three business days after being presented a change order to sign the change order, and if the change order is not signed, then work stops until the owner signs to accept change order or provides written notice of declination.
Dispute Resolution. Attorneys can also help their clients avoid lawsuits by drafting contract provisions that provide a process for owners and contractors to resolve dispute early.
Many contracts require an in-person “meet and confer” to discuss payment issues, alleged defective work, other disputes. Contracts may also include a requirement that the parties engage in mediation before resorting to arbitration or court. Attorneys should also consider specifying a dispute forum and/or litigation venue in the contract.
Conclusion: Be Aware
Residential construction contracts pose unique challenges for contract drafters in Wisconsin. Attorneys can better serve their residential contractor and homeowner clients by being aware of the various statutory requirements imposed on contractors and the challenges brought by homeowners’ close involvement in completing these types of projects.
This article was originally published on the State Bar of Wisconsin’s Construction and Public Contract Law Section Blog. Visit the State Bar sections or the Construction and Public Contract Law Section web pages to learn more about the benefits of section membership.
1 See Wis. Stat. Admin Code §§ ATCP 110.05(1), 110.023, 110.027(1).
2 See Wis. Admin. Code § ATCP 110.02.
3 See Wis. Stat. § 779.02.
4 Wis. Admin. Code § ATCP 110.025.
5 Wis. Stat. § 101.148.
6 Wis. Stat. §§ 895.07(2), (3).