Look Before You Leap

It is common knowledge that the construction industry has been one of the hardest hit sectors by the global financial crisis over the last five years. However, there are promising signs of recovery and even rapid growth among select construction disciplines in certain geographic locations. Specifically, the U.S. has seen a large uptick in residential construction in the past year. With this increase come new players wanting to supplement their stagnant commercial divisions. In order to avoid almost certain pitfalls, these new players must be conscious and cautious of the differences between residential and commercial construction. For example, firms new to the game must be cognizant of building codes, potential LEED requirements, local regulations, audits, and potential incentives in order to maximize their return and avoid devastating mistakes.

Data released by the Department of Housing and Urban Development on April 16 shows what many in the construction industry already know – residential building continues to show dramatic improvement. As of March 2013, there was a 17.3 percent increase in building permits for privately owned housing units from March 2012. During that same time, privately owned housing starts jumped 46.7 percent while privately owned housing completions escalated 36.3 percent.

Other information released from the American Institute of Architects confirms the same tendencies. AIA’s Architecture Billing Index for February 2013 shows that while commercial construction took an upward turn in August 2012 and continues to slowly rise, residential construction has risen sharply with a strong performance over the few months leading up to February 2013. A recent release by the Associated General Contractors of America reports that construction employment rose in 30 states in March 2013. Nationally, 18,000 construction jobs were added in March, which marked the 10th consecutive month with an increase.

Getting in the Game

With commercial construction seeing no significant signs of improvement and residential construction continuing to rise at sharp rates, it is no surprise that many firms with little or no residential building experience are entering the fray. Firms with less experience need to be careful maneuvering through ever-changing and sometimes foreign building restrictions and regulations. Knowing the standard codes are not enough. Even if your firm is a seasoned residential builder, two-thirds of architecture firms surveyed by the AIA state that building codes and regulations have become “more stringent” in recent years.

One event that has led to some of the increases in residential construction is the rebuilding efforts that have resulted from the destruction waged by Hurricane Sandy. The National Hurricane Center estimates that Sandy caused more than $71 billion dollars in damage in the United States with New Jersey suffering an estimated $30 billion in damages.

Whether the construction is remediating a damaged building or erecting a new building, contractors must take each state’s laws into consideration and know the differences between the requirements of each state. In New Jersey, many of the storm-damaged structures will be remediated or repaired. Pursuant to New Jersey’s Contractors’ Registration Act, which is a subset of the larger Consumer Fraud Act, all home improvement contracts must meet certain criteria, which include the following: the contract, if the value is in excess of $500, must be in writing; it must contain the legal name of the contractor; it must contain a copy of the commercial general liability insurance certificate; it must detail the total price and finance charges; and it must provide terms in which the consumer may cancel the contract and the method for doing so. In addition, firms or persons who indicate to the public that they are a contractor in New Jersey must register with the state and display their registration on all advertisements, business documents, contracts and correspondence with consumers, and on all commercial vehicles. If a contract is improperly entered into, the repercussions include the revocation or refusal to renew a contractor’s state registration entitling the contractor to work in the state, suspension of the contractor’s registration, or issuance of a monetary penalty.

If the project is new construction rather than a repair or remediation, it is still important to know which building codes the state or local government requires, whether any green building incentives are relevant, and whether certain contract provisions and remedies are enforceable. For example, can one waive its right to file a mechanics’ lien for unpaid labor or materials on a residential project? In New Jersey and New York, the answer is no; in Virginia, the answer is yes; in Pennsylvania and Maryland, the answer is that it depends if certain additional criteria are met. For example, in Pennsylvania, a general contractor may waive its right to file a lien on a residential building if the total contract value is less than $1 million. 

When it comes to preparing and filing a lien, the process from state to state is not uniform. Some factors or requirements to consider include: whether a preliminary notice is required; the time for sending a notice or filing the lien; how the lien is served and who it must be served upon; the contents of the lien; the priority of the lien based on the contractor’s tier and whether arbitration is required. In a residential context, rights arising from the local payment statute can also differ from what the commercial contractor is familiar.

Although there may be a strong temptation to “get in the game” and become a residential construction player, firms should not rush onto the field without making sure they are able to comply with state rules, regulations and registrations. While the residential building boom is an overall positive sign for things to come, commercial builders must exercise diligence or face potentially devastating penalties. 

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