Weekly Update: May 11, 2017

We finally coordinated schedules after talking about it for the past four years – most of the local HBA executive officers got together for a mini retreat last week at the Riverside Casino. It was an excellent opportunity to get to know one another a little better and coordinate efforts. From left to right: Julie Huffer (Quad Cities Builders & Remodelers Association); Stacy Woodward (Ames HBA); Bob Manning (Cedar Valley HBA); Dan Knoup (HBA of Greater Des Moines); Karyl Bohnsack (Greater Iowa City HBA); and Jay Iverson (HBA of Iowa). Also participating was Melissa Olson (Greater Cedar Rapids Housing & Building Association).

Governor Signs Bills Impacting Residential Construction

We’ve discussed these bills multiple times in this newsletter, but there is still much confusion within our membership. Here is an excellent synopsis by Jodie McDougal, Attorney at the Davis Brown Law Firm from May 4, 2017:

Two bills were recently passed by the Iowa Legislature and signed into law by Governor Terry Branstad. Senate File 413 deals with the statute of repose for construction projects and House File 586 expands the contractors required to file a “Commencement of Work” notice in order to maintain their lien rights on residential construction projects. Both will impact the residential construction industry in different ways.

Statute of Repose Senate File 413
What Happened?

For decades, Iowa contractors and design professionals have had to deal with the fact that they could be hauled into court over an alleged problem with one of their buildings that was designed and constructed over 10, 12, or even 15 years prior to the lawsuit being filed. The reason? Iowa had one of the longest statutes of repose in the entire country. In short, Iowa’s 15-year statute of repose allowed plaintiffs to bring construction and design defect lawsuits against the original designers and contractors anytime within 15 years of a building being constructed under certain circumstances. On April 13, 2017, and after years of legislative efforts by various trade associations and other groups, this fact changed, as Governor Branstad signed SF413 into law, substantially reducing the Statute of Repose applicable to most construction claims. This is great news for the Iowa construction industry.

Remind me – What is the Difference between a Statute of Repose and a Statute of Limitations?

A statute of limitations is different from a statute of repose. A statute of limitations for a particular cause of action is triggered by an injury, or at times, the date in which the injury was or should have been discovered. There are various statutes of limitation applicable to construction and design claims in Iowa. The statute of limitations for claims for breach of a verbal agreement, professional negligence, breach of the implied warranty of workmanlike construction, breach of other implied warranties, and other property damage claims is five years. The statute of limitations for claims for breach of a written construction agreement, design agreement, or other written agreement is ten years.

Conversely, a statute of repose represents an absolute outer bar to all claims, regardless of the applicable statute of limitation and of when the statute of limitation began, including in situations in which the statute of limitation is tolled, i.e., does not begin, until the injury is actually discovered by the claimant. Also, the statute of repose clock begins to run on the date a construction project is completed; it does not wait for an injury to occur. As noted, for decades Iowa has had a 15-year statute of repose, meaning that under the right circumstances, all of the aforementioned claims having 5 or 10-year statutes of limitations could be brought for up to 15 years.

What Does the New Statute of Repose Law Mean for Me?

This law reduces Iowa’s current 15-year statute of repose for all claims arising out of a defective or unsafe condition of an improvement to real property to 8 years for commercial construction and 10 years for residential construction. Please note that the law has the following exceptions:

  1. claims regarding nuclear power plants, interstate pipelines, and fraud/intentional misconduct claims will maintain a 15-year repose period, and
  2. if the unsafe or defective condition was discovered within one year of the expiration of the new statute of repose period, then the repose period would be extended for one additional year.

Moving to 8 years for commercial construction will bring Iowa more in line with our neighboring states, which have 4-10 year statutes and, will also avoid litigation 15 years after a project was completed, which many times involves faulty or faded memories, evidence being lost or stale, witnesses being unavailable, and companies being sold or not in business by the time of litigation.

When Does the New Statute of Repose Law Take Effect?

The new statute of repose law will take effect on July 1, 2017. The law does not have any retroactive effect. In addition, the law contains an express provision regarding applicability:

Sec. 2. APPLICABILITY. This Act does not apply to an improvement to real property in existence prior to the effective date of this Act or to an improvement to real property, whether construction has begun or not, that is the subject of a binding agreement as of the effective date of this Act.

This means that, if the construction project has not begun as of July 1, 2017 and if your company’s construction or design agreement has not yet been executed as of July 1, 2017, then the new, shorter statute of repose will apply to your company.

Conversely, the old 15-year statute of repose applies if either the “improvement to real property” is already “in existence” as of July 1, 2017, or your company has already signed “a binding agreement” regarding the construction project as of July 1, 2017 regardless of whether construction on the project has begun.

Bottom Line

This law is enormously beneficial for Iowa construction companies and design professionals, both in terms of shortening the time period during which these companies can be sued, as well as a possible reduction in the insurance premiums paid by these companies.

To prepare for the implementation of this law, you should have a conversation with your insurance brokers about your premiums and work with your attorney to ensure that your contracts and records retention policies are in line with the new law.

Commencement of Work Notices for Residential Projects House File 586
What Does the New Pre-Lien Notice Law Mean For My Company?

On April 7, 2017, the Governor signed House File 586 into law. The law takes effect on July 1, 2017. The law expands the category of residential contractors who are required to file the pre-lien notice termed the “Commencement of Work” Notice (or C.O.W. Notice) in order to preserve their mechanic’s lien rights on a residential construction project.

Prior law only required general contractors (i.e., companies directly supplying materials or labor to the homeowner) with subcontractors to file a C.O.W. Notice on the MNLR online registry no later than 10 days from the start of every residential construction project in order to preserve their lien rights. This
interpretation of the law was affirmed by the Iowa Court of Appeals in 2016 in the mechanic’s lien case of Standard Water v. Jones in which Jodie McDougal represented a residential contractor.

The new law requires all general contractors (that is, all contractors who directly work for a homeowner) to timely file a C.O.W. Notice at the outset of each residential project to preserve their lien rights, regardless of whether subcontractors will be used on the project. Thus, even contractors who self perform all work without any “subcontractors,” as well as suppliers who supply directly to homeowners, will now have to timely file this C.O.W. Notice within 10 days of the start of their residential projects to preserve their lien rights.

While this law, which was introduced and supported by those in the lending and closing industries, negatively impacts certain residential contractors by now requiring them to file C.O.W. Notices, the law positively affects those in the lending and closing industries and will streamline their loan closing practices. In particular, by late 2017, lenders and closing agents will likely no longer ask for all lien waivers; instead, they will check the MNLR registry and only be concerned with general contractors and subcontractors who have properly preserved their lien rights through their timely filing of their pre-lien notices.

What is the Bottom Line?

As of July 1, 2017, all general contractors, subcontractors, and suppliers on residential projects who want to preserve their mechanic’s lien rights on residential projects must timely file their C.O.W. Notice (for general contractors and others working directly for an owner) or Preliminary Notice (for subcontractors) at the outset of such projects. Otherwise, all lien rights are lost.

Please contact attorney Jodie McDougal should you have any questions regarding this law. Jodie McDougal, Davis Brown Law Firm, 515-288-2500, jodiemcdougal@davisbrownlaw.com Jodie is a Construction Law and Real Estate Attorney and serves as the Chair of the Construction Law Department. In her construction law and real estate law work, Jodie represents commercial and residential general contractors and builders, architects and engineers, remodelers, subcontractors, suppliers, and owners. Her work includes contract preparation and negotiation, project administration, mechanic’s liens and public/Chapter 573 claims; warranty claims; loss prevention work; purchase agreement disputes; landlord matters; and various other construction project dispute and litigation matters.

The HBA of Iowa fishing team didn’t do very well for our Association in the Annual Wall-Iowa tournament on Lake Erie last weekend. While you were all enjoying 73 degrees and sunny weather, we were shut out on two of the three days by 40 degree temps, 25 mph winds, and heavy rains. We finished dead last with only 45″ of walleye with two fish. From left to right: Mike Farr (Cascade Manufacturing); Steve Archer (Ferguson); Kevin Hupp (Hupp Toyotalift); Tanner Iverson; Jay Iverson (HBA of Iowa); and Ron Sweeting (Ron Sweeting Construction).

Construction Sector Labor Market Turnover

The count of unfilled jobs in the construction sector fell slightly in March, after an upward revision to the February estimate. Moreover, the rate of quits is rising as tight labor market conditions continue.

According to the BLS Job Openings and Labor Turnover Survey (JOLTS) and NAHB analysis, the number of open construction sector jobs (on a seasonally adjusted basis) stood at 172,000 in March. The cycle high was 238,000, set in July of last year.

The open position rate (job openings as a percent of total employment) for March came in at 2.4%. On a smoothed twelve-month moving average basis, the open position rate for the construction sector held steady at 2.65%, near the cycle high.

The overall trend for open construction jobs has been increasing since the end of the Great Recession. This is consistent with survey data indicating that access to labor remains a top business challenge for builders. However, a recent increase in hiring has reduced the current level of unfilled jobs in the sector. In fact, the hiring rates in December and January, 5.9% and 5.7% respectively, mark the strongest two months since early 2015.

The construction sector hiring rate, as measured on a twelve-month moving average basis, held at 5.1% in march. The twelve-month moving average for layoffs was steady (2.7%), remaining in a range set in 2014.

Quits have been rising recently, increasing to 2.5% in March. This is the highest rate of quits for the cycle. This measure is consistent with other data illustrating a tight and competitive labor market for construction workers.

Monthly employment data for April 2017 (the employment count data from the BLS establishment survey are published one month ahead of the JOLTS data) indicate that home builder and remodeler employment growth was flat, growing by just 900. This comes after an employment decline in March, which was the first monthly drop in 9 months. The 6-month moving average of job gains for residential construction now stands at somewhat above 12,000 a month.

Residential construction employment is now 2.692 million, broken down as 763,000 builders and 1.929 million residential specialty trade contractors.

Over the last 12 months home builders and remodelers have added 109,000 jobs on a net basis. Since the low point of industry employment following the Great Recession, residential construction has gained 709,300 positions.

In March, the unemployment rate for construction workers stood at 6.3% on a seasonally adjusted basis. The unemployment rate for the construction occupation had been on a general decline since reaching a peak rate of 22% in February 2010, although it has leveled off in the 6% to 7% range since the middle of 2016.

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