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Many Idaho contractors are seeking work in other states as a result of the current local construction market and opportunities in other areas. Energy related construction in states like North Dakota has attracted contractors from all over the country. Although these states offer substantial business opportunities, Idaho contractors should be aware of potential problems that can arise when performing work in other states.

Typical statutory and regulatory schemes that impact contractors include licensing and registration requirements; registration requirements for foreign companies to do business in-state; insurance, bonding, and workers’ compensation requirements; sales and use tax at a state and local level; prevailing wage and local preference labor requirements; and ability to recover amounts owed pursuant to mechanic’s liens, payment bonds, and stop notices. Because these requirements vary from state-to-state, contractors should become familiar with local laws before seeking out-of-state work.

Due to its booming construction market, North Dakota provides a good example of some potential issues awaiting Idaho contractors when performing interstate work. The following differences between Idaho and North Dakota law illustrate only some of the relevant issues that exist between the laws of each state.

As with Idaho’s contractor registration requirement, North Dakota requires that all contractors working in the state obtain a contractor’s license before engaging in the business of a contractor on any project exceeding $2,000.00 in value. In Idaho, certain contractors, such as licensed electricians and plumbers, are exempt from contractor registration when engaging in their licensed trade. In contrast, North Dakota requires that licensed trade contractors obtain both a contractor’s license and their respective trade license. Additionally, North Dakota’s licensing statute provides four license categories based on contract value and contractors cannot perform work on contracts exceeding the value of the license. Idaho has no such requirement for private construction projects. Idaho contractors should be aware of these and similar technical nuances to ensure compliance with North Dakota’s licensing requirements.

The potential penalties for North Dakota’s licensing requirements also differ from Idaho. In both states, performing work without the proper registration or license may result in a misdemeanor. In North Dakota, however, engaging in work without the proper license subjects a contractor to North Dakota’s consumer protection laws. Thus, in the event of a lawsuit, failure to comply with the licensing requirements could subject a contractor to liability up to three times actual damages and the party bringing the action would be entitled to recover all attorneys’ fees and costs. Clearly, failure to comply with North Dakota’s licensing requirements could become a costly error.

In addition to contractor licensing, the differences between the lien laws in Idaho and North Dakota illustrate the need for care before expanding business outside of Idaho’s borders. These differences are both technical and substantive in nature.

Idaho and North Dakota both require that a contractor record its claim of lien within ninety (90) days after completing work. Unlike Idaho, North Dakota also requires that a contractor give the owner of real property written notice of its intent to record a lien claim at least ten (10) days before recordation. Without knowledge of this requirement, an Idaho contractor would be precluded from timely recording its claim of lien by attempting to file within the last ten (10) days. A claim of lien filed in North Dakota must also contain the dates of the contractor’s first and last day of work on the project site. This requirement is absent from Idaho’s lien statute.

In addition to technical differences between the lien laws in Idaho and North Dakota, construction lenders and property owners are afforded far greater rights under North Dakota’s laws. Unlike Idaho, a mortgage securing a construction loan in North Dakota has priority over a mechanic’s lien even when it is recorded after visible work begins on the improvement. During periods of depressed property values, this could potentially render a contractor’s lien right valueless. Further, in contrast to Idaho’s lien laws, which provide costs and attorneys’ fees to successful lien claimants, North Dakota law requires that a court award an owner costs and reasonable attorneys’ fees for successfully contesting the validity or accuracy of a lien claim.

When working in states like North Dakota, which favor the interests of lenders and owners, Idaho contractors should more aggressively negotiate contractual payment provisions, require strict compliance with such provisions, and seek further security when possible.

While these are only some of the differences between Idaho and North Dakota laws, they indicate the potential cost of performing work in other states without sufficient knowledge. Make sure you consult with your attorney and have him or her investigate the local laws pertinent to your company’s business before seeking work in another state.

(Published in the Idaho Business Review, October 2012)

The current economic downturn and credit crisis is causing significant problems for the construction industry. As new projects become scarce, competition for the limited work increases as companies seek to keep their employees working. This sounds like a “good” deal for owners but it comes with some added risks. Owners must balance the desire to accept the lowest bids received with the risk that the contractors submitting those bids are under-estimating costs and may default before the project is complete. This is also a risk to general contractors who rely upon low bids from subcontractors desperate to get new work. As such, owners and contractors on both public works and private construction projects must implement risk management strategies to minimize the risk of default.

Performance bonds are almost always required for public works projects as a way to protect the public while accepting the lowest bids through an open, competitive bidding system. Performance bonds are agreements among and between at least three parties: (1) the principal – the primary party who will be performing the underlying contractual obligation; (2) the obligee – the party who is the recipient of the principal’s obligation; and (3) the surety – the party who guarantees that the principal’s obligations will be performed. Under these agreements, the surety guarantees to the obligee that the principal will fully perform the underlying construction contract between the principal and obligee. In the public works context, the obligee is the government entity, the principal is the general contractor, and the surety is the bonding company. The bonding company guarantees to the government entity that the contractor shall perform in accordance with the terms and conditions of its underlying contract. If the contractor fails to meet its obligations, the surety becomes liable to the amount of the bond.

As in the public works arena, owners and contractors can also protect private construction projects by requiring performance bonds. The decision generally depends on two factors: the added cost of requiring the bonds, and the financial stability of the contractor or subcontractor submitting the bid. In times of economic hardship, the second factor becomes more important for several reasons. First, the cost of replacing a defaulting contractor or subcontractor is often much higher than the original bid. This is even more pronounced when the original bid was submitted at or below the actual cost to perform the contract. Second, the party who absorbs the cost of hiring the replacement contractor or subcontractor may have little or no luck collecting from a defaulting party who files for bankruptcy or closes its doors.

The increased cost on a project due to performance bond requirements is another important factor to consider. The cost is a premium based on the amount of the underlying contract and is adjusted as the contract amount changes. The owner generally pays this additional cost because it passes through the contractor’s bid and change orders.

Owners typically contract only with one prime contractor on a project. They must decide whether to incur the additional costs of requiring a performance bond to protect against the failure of the prime contractor to fully perform the work. Prime contractors, on the other hand, have multiple subcontracts with many different trade contractors on each project. Thus, in addition to evaluating the financial stability of each subcontractor, they must decide whether to incur the added cost of bonding each subcontractor or whether to bond on certain portions of a project. At the very least, contractors should take the time to identify which portions of a project, if abandoned by the subcontractor, would cause the most serious financial contract with the owner.

Owners and contractors can reduce the potential financial risk arising from a defaulting contractor or subcontractor by requiring performance bonds on a project. The rights arising under a performance bond may be lost, however, if the claimant does not comply with the bond’s technical claim requirements. As claim requirements are defined by the bond itself, owners and contractors should become familiar with its terms and conditions. Great care must be taken in providing all required notices to the appropriate parties in a timely manner. Additionally, bond claimants should retain detailed documentation regarding the defaulting party for the bonding company’s review. Finally, a lawsuit to enforce bond rights must be filed within the deadlines established by the bond.

Hard economic times create more competition in the construction industry. Thus, owners have the opportunity to contract for construction projects at a discount. By understanding and preparing for the risks that accompany this increased competition, owners and contractors can avoid turning a potential bargain into a substantial loss.

(Published in the Idaho Business Review, February 2009)

Contractors pride themselves on building projects that will stand the test of time. Unfortunately, however, claims often arise after final completion of a project. In these instances it is important to know that the Idaho Legislature has enacted statutory limitation periods which set a maximum period of time in which a contractor is liable for these claims.

A statute of limitations sets the maximum period for which a claim may be brought after a cause of action has accrued. A cause of action generally accrues when the person knows, or reasonably should know, that he or she has a claim against another party. A statute of repose, on the other hand, bars any claim brought after a specified period of time, regardless of the when the action accrued.

Claims against contractors arising after final completion of the project generally fall into two categories: (1) breach of contract actions by a party to the contract seeking economic damages; and (2) negligence actions by third parties seeking damages for personal injury or injury to property. The application of Idaho’s statute of limitations and statute of repose differ depending on which cause of action is sought by the claimant.

The majority of claims against contractors are founded on breach of contract. Generally, the rights and obligations of parties to construction contracts are memorialized by executing a written contract. Any action for breach of contract which is founded upon an instrument in writing must be brought within five years of the time of accrual. The statute of repose provides, however, that a contract action arising out of supervision or construction of improvements to real property accrues at the time of final completion of the project. As a result, claims founded on breach of a written construction contract are generally barred if not asserted within five years from the project’s final completion date.

The Idaho Supreme Court has even upheld this statute of repose where a contractor discouraged an owner from filing suit until the limitation period had lapsed. The contractor and owner unsuccessfully attempted to remedy the defects throughout the five year limitation period. Eventually, the owner remedied the construction defects for $3.4 million and brought suit against the contractor for breach of contract. The Court barred the owner’s claim for breach of contract because it was brought five years and four months after the parties executed the acceptance certificate for the project.

The Idaho statute of limitations for negligence claims accrues at the time the act or omission complained of occurs, and runs for a period of two years. Idaho courts distinguish between latent defects and patent defects when determining the time of accrual for negligence claims.

Patent defects are project defects that are apparent to a normally observant person upon its final completion. A negligence cause of action based on a patent defect accrues at the final completion of the project because it should have been discovered at that time. Therefore, the statute of repose for a negligence claim based on a patent defect is two years from the project’s final completion date.

Latent defects, on the other hand, are project imperfections that are not discoverable by reasonable inspection at final completion. A negligence cause of action based on a latent defect generally accrues when the party bringing the claim discovers the defect. Under Idaho’s statute of repose, however, any negligence cause of action against a contractor for damages resulting from latent defects in an improvement to real property accrues six years from final completion of the project if it has not previously accrued. Consequently, a negligence claim arising out of construction of improvements to real property must be brought within two years of discovery and in no event later than eight years following project completion. This eight year statute of repose is generally the longest period of time for which a contractor may be held liable for claims based on construction of a project under Idaho statute.

The Idaho statute of repose is helpful to contractors in two ways. First, it defines the minimum time period for which a contractor should preserve evidence related to a project. This can be vital for a contractor’s defense in the event a claim arises for either breach of contract or negligence. It also allows contractors to focus on current and future obligations without the threat of incurring liability from projects that have been complete for a reasonable period of time. Although these are the general principles related to the time in which a lawsuit can be filed against a contractor, an attorney should be consulted for particular circumstances.

(Published in the Idaho Business Review, August 2007)

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