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Construction Programs & Results Inc

We Like to See The Good Guys Win!

Protecting Yourself from the Protector

by Michael Stone

I'm not a fan of working with government agencies, but some situations are unique. A note we received:Working with Government Agencies #MarkupAndProfit

"Hi Michael, my husband and I attended your one-day class a few years ago. Not a month goes by when we don't haul out your big book and look up the answer to a question.

We now have a problem that I can't find mentioned in your books.

We have a client who is remodeling her home. We divided the project into three phases. We're almost done with Phase 2. It's gone pretty smoothly and she and her husband have always paid us.

But they've run out of money for Phase 3 (we've presented the proposal to them). They're getting a construction loan from a bank and since the amount is over $35,000, they are supposedly required to use a HUD Consultant to "play quarterback" during Phase 3.

There are several onerous terms in the required HUD contract, and it seems totally slanted against the contractor. We met with the HUD consultant and homeowners and the guy talks like he's the homeowner's savior who's gonna keep us the contractor honest.

If you have any expertise to offer on this subject, we'd like to hire you for a consultation. We have a lawyer we can talk to also, but first we'd like your take on the matter.

Thanks, and we hope you and Devon are doing well."

Normally, this is one of those situations that I'd consider walking away from, because the HUD consultant sounds like a royal pain.

However, they've already done two jobs for the folks and it's been a good relationship. It's hard to walk away at this point, and it's possible to make it work.

They need to make clear to everyone that their contract is not with HUD, it's with the homeowner. The contractor should have every right to put the homeowner between them and the HUD consultant.

They can include contract language that says this is how they are going to build the job. If the HUD consultant has any concerns during the project, he can deal with the homeowner who will share those concerns with the contractor. If the concern is a specific code violation, the contractor will deal with it immediately.

However, if the concern is a personal opinion of the HUD consultant or about a HUD rule, that will have to be dealt with between the homeowner and HUD. As long as the work is done to code, the contractor won't make changes because the HUD inspector doesn't like something.

The contractor should include a daily penalty in the contract for any delays caused by outside sources (like HUD). It's the owner's responsibility to keep pressure on the HUD people to make inspections and payments on time. The homeowner has far more influence on HUD than the contractor has. The contract should state that they won't allow a delay on the job unless there is a legitimate code concern on the job.

There also needs to be a specific payment schedule in the contract. If there are any delays, interest will be charged on the funds due and that they have the right to shut the job down if payment schedules are not met. Don't keep working on the job it payments are late. Shut the job down. Let the owner fight that battle with the HUD people.

They mentioned terms in the required HUD contract. Does that mean that the contractor is required to sign a contract directly with HUD? If that's the case, Chapter 7 in Markup & Profit Revisited has language (just before "Good Contracts Have Well-Defined Pay Schedules") that can be adjusted to neutralize the HUD language. Clear it with your lawyer, then ask HUD to sign it. If they won't sign it, walk away. Don't get involved with any contract that isn't win-win for both sides. By the way, also check out the information on retainage and penalty clauses under the heading "Doing Business with Government Agencies" in the same chapter.

That's the advice I shared with this contractor a few months ago. I called to ask for an update and learned that the contractor chose to walk away from the project, primarily because of the attitude of the inspector. The homeowner is bringing in subcontractors to do the next project under the oversight of the inspector.

I wish the homeowner well. I'm proud of the contractor for having the courage to walk away from a project that could get ugly fast, and for having other projects in the pipeline making it easier to walk away. When they finished their portion of the project, they took detailed photos of their work so they can't be blamed for any issues that might arise after they left the jobsite.

I've dealt with many government agencies and few of those dealings have been pleasant. There are many more productive things you can do with your time that deal with government bureaucrats who don't know business, and don't care about yours.

 

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