TITLE 18. PROFESSIONAL AND OCCUPATIONAL LICENSING

BOARD FOR CONTRACTORS

Proposed Regulation

Title of Regulation: 18VAC50-22. Board for Contractors Regulations (amending 18VAC50-22-260).

Statutory Authority: § 54.1-201 of the Code of Virginia.

Public Hearing Information:

May 9, 2023 - 3 p.m. - Department for Professional and Occupational Regulation, 9960 Mayland Drive, 2nd Floor Conference Center, Board Room 2, Richmond, Virginia 23233

Public Comment Deadline: May 26, 2023.

Agency Contact: Marjorie King, Administrator, Board for Contractors, 9960 Mayland Drive, Suite 400, Richmond, VA 23233, telephone (804) 367-2785, FAX (866) 430-1033, TDD (804) 527-4290, or email contractors@dpor.virginia.gov.

Basis: Section 54.1-1102 of the Code of Virginia provides the Board for Contractors with the authority to promulgate regulations not inconsistent with the Code of Virginia and necessary for the licensure of contractors.

Purpose: As the construction industry has evolved, more contractors are moving away from the fixed-price contract concept. A significant number of new home builders have shifted to cost-plus contracts, and an equally significant number of trade-related and repair contractors have moved to time and materials contracts. The expansion of the use of types of contracts has been exacerbated by the volatility of the construction materials market. Proposed amendments to 18VAC50-22-260 include provisions for different contracts available within the industry for licensees to utilize.

One of the requirements of the licensee when using cost-plus and time and material contracts will be to include certain information within the licensee's contract to educate the consumer on the type of contract being presented to the consumer. This will allow the consumer to make an informed decision as to whether the consumer wants to enter into that type of contract or not. This regulatory change, while currently used and accepted throughout the industry, will eliminate regulatory violations. This change is reducing regulatory burden on licensees while not increasing the risk to the public of (i) unsafe building repairs or construction work or (ii) deceptive practices.

Substance: The proposed amendments provide the minimum requirements of a written contract for licensees engaged in residential contracting, as defined in the regulation. One of those requirements provided is a statement of the total cost of the contract. The proposed amendment would add specific language to include cost-plus and time and material contracts.

Issues: The advantage to the public of this action is to allow the consumer to make an informed decision about entering into a certain type of contract. Consumers would not be required to sign any particular type of contract. It would be up to the contractor and the consumer to agree. Even though it eliminates risk for the licensee, the resulting cost for the consumer may be lower. The advantage to the agency of this action is to align the board and agency with industry standards and the types of contracts currently in use throughout the construction industry. This could reduce the number of regulatory violations related to contracts. There are no disadvantages to the public or the Commonwealth.

Department of Planning and Budget's Economic Impact Analysis:

The Department of Planning and Budget (DPB) has analyzed the economic impact of this proposed regulation in accordance with § 2.2-4007.04 of the Code of Virginia (Code) and Executive Order 14 (as amended, July 16, 2018). The analysis presented represents DPB's best estimate of these economic impacts.¹

Summary of the Proposed Amendments to Regulation. The Board for Contractors (Board) proposes to amend 18VAC50-22, Board for Contractors Regulations (regulation) to allow time and material contracts as well as cost-plus contracts.²

Background. The current regulation lists "statement of the total cost of the contract" as one of the minimum requirements for contracts in residential contracting.³ Up until June 2021, the Board had responded to accurate complaints⁴ concerning contracts that did not contain a statement of the total cost of the contract by assessing fines.⁵ The average fine for contract violations is $450.⁶ It was brought to the Board's attention that cost-plus contracts and time and materials contracts were becoming more commonly used in residential contracting.⁷ For those two types of contracts, the total cost cannot be precisely known ahead of time. Once this was brought to the Board's attention, it stopped assessing fines for cost-plus contracts and time and materials contracts that did not contain a statement of the total cost of the contract.⁸

Instead of requiring a "statement of the total cost of the contract," the proposed regulation would require a:

"statement regarding total cost of the project with regards to the type of contract being specified:

(1) Standard total value project: a statement of the total cost of the contract

(2) Cost plus: a statement identifying the type of cost plus contract, fee or percentage, and a cap at which the total dollar amount cannot exceed

(3) Time and materials: A fixed price for labor that includes wages, overhead, general and administrative costs and mark-up for profit and the cost of materials."

Estimated Benefits and Costs. According to DPOR, as the construction industry has evolved, more contractors are moving away from the fixed price contract concept (standard total value project). A significant number of new home builders have shifted to cost-plus contracts and an equally significant number of trade-related and repair contractors have moved to time and materials contracts.⁹ This has been exacerbated by the volatility in costs of construction materials, particularly copper and lumber.

If a contractor signs a standard total value contract, and the prices of construction materials increase substantially before he can purchase the materials, he may be committed to a project where he would lose money or it would not be worth his time and effort if he knew the profit would be so small. On the other hand, if the contractor quotes a very high price for a standard total value contract to take account for the possibility of big increases in the cost of construction materials, he risks losing business. The cost-plus and time and materials contracts largely eliminate the possibility of losing money on the projects since the customer is charged more than the cost of the materials in both of these type of contracts. Thus, allowing these types of contracts is beneficial for contractors.

By amending the language to include provisions for the two additional types of contracts, contractor licensees would legally be able to utilize all types of contracts largely available within the industry nationally.¹⁰ Consumers would not be required to sign any particular type of contract, though. It would be up to the contractor and the consumer to agree. One of the requirements of the licensee when using cost-plus and time and material contracts would be to include certain information within their contract to educate the consumer on the type of contract being presented to them. This would allow the consumer to make an informed decision if they want to enter into that type of contract or not. Thus, the proposed amendments do not in practice introduce costs.

To the extent that the addition in allowable types of contracts increases the likelihood that licensees and consumers can find contracts that both are willing to sign, consumers may benefit as well. For example, as described, licensees may only be willing to quote a very high price if they are restricted to only using a standard total value contract. With the cost-plus contract, the licensee could include the very high price as the cap at which the total dollar amount cannot exceed. The consumer may be more agreeable to the latter contract because, even though it eliminates risk for the licensee, the resulting cost for the consumer may be lower.

Businesses and Other Entities Affected. The proposed amendments potentially affect the 54,179 licensed contractors¹¹ in the Commonwealth, as well as their potential customers. According to DPOR, a significant number of new home builders have shifted to cost-plus contracts, and an equally significant number of trade-related and repair contractors have moved to time and materials contracts. Thus, these types of contractors would likely be particularly affected.

The Code of Virginia requires DPB to assess whether an adverse impact may result from the proposed regulation.¹² An adverse impact is indicated if there is any increase in net cost or reduction in net revenue for any entity, even if the benefits exceed the costs for all entities combined. The proposed amendments do not introduce cost. Thus, an adverse impact is not indicated.

Small Businesses¹³ Affected.¹⁴ The proposed amendments do not appear to adversely affect small businesses.

Localities¹⁵ Affected.¹⁶ The proposed amendments neither disproportionally affect any particular locality nor introduce costs for local governments.

Projected Impact on Employment. The proposed amendments do not appear to substantively affect total employment.

Effects on the Use and Value of Private Property. The proposed amendments may increase the use of time and material contracts as well as cost-plus contracts in the Commonwealth. This may in turn increase net profits for these firms, increasing their value. The proposed amendments do not increase costs for real estate development.

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¹Section 2.2-4007.04 of the Code of Virginia requires that such economic impact analyses determine the public benefits and costs of the proposed amendments. Further the analysis should include but not be limited to: (1) the projected number of businesses or other entities to whom the proposed regulatory action would apply, (2) the identity of any localities and types of businesses or other entities particularly affected, (3) the projected number of persons and employment positions to be affected, (4) the projected costs to affected businesses or entities to implement or comply with the regulation, and (5) the impact on the use and value of private property.

²With a cost-plus contract, the contractor gets paid for all expenses of a project plus either an agreed-upon profit, which is usually defined as a percentage of the contract's total costs, or a fixed fee.

³More specifically, failure to have a "statement of the total cost of the contract" in the written contract is listed as a prohibited act.

⁴An accurate complaint is when the Board agrees that the contract did not contain a statement of the total cost of the contract. If someone made such a complaint, but the Board thought the wording was such that it did contain a statement of the total cost, no fine would be assessed.

⁵Source: Department of Professional and Occupational Regulation

⁶Ibid

⁷Ibid

⁸Ibid

⁹Ibid

¹⁰In practice, despite the current language in the regulation, contractors in the Commonwealth have already been using the two additional types of contracts.

¹¹Data source: Department of Professional and Occupational Regulation

¹²Pursuant to § 2.2-4007.04 D: In the event this economic impact analysis reveals that the proposed regulation would have an adverse economic impact on businesses or would impose a significant adverse economic impact on a locality, business, or entity particularly affected, the Department of Planning and Budget shall advise the Joint Commission on Administrative Rules, the House Committee on Appropriations, and the Senate Committee on Finance. Statute does not define "adverse impact," state whether only Virginia entities should be considered, nor indicate whether an adverse impact results from regulatory requirements mandated by legislation.

¹³Pursuant to § 2.2-4007.04, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

¹⁴If the proposed regulatory action may have an adverse effect on small businesses, § 2.2-4007.04 requires that such economic impact analyses include: (1) an identification and estimate of the number of small businesses subject to the proposed regulation, (2) the projected reporting, recordkeeping, and other administrative costs required for small businesses to comply with the proposed regulation, including the type of professional skills necessary for preparing required reports and other documents, (3) a statement of the probable effect of the proposed regulation on affected small businesses, and (4) a description of any less intrusive or less costly alternative methods of achieving the purpose of the proposed regulation. Additionally, pursuant to § 2.2-4007.1 of the Code of Virginia, if there is a finding that a proposed regulation may have an adverse impact on small business, the Joint Commission on Administrative Rules shall be notified.

¹⁵"Locality" can refer to either local governments or the locations in the Commonwealth where the activities relevant to the regulatory change are most likely to occur.

¹⁶Section 2.2-4007.04 defines "particularly affected" as bearing disproportionate material impact.

Agency's Response to Economic Impact Analysis: The Board for Contractors concurs with the approval of the economic impact analysis created by Department of Planning and Budget.

Summary:

The proposed amendments (i) allow contractors to provide to consumers time and material contracts and cost-plus contracts, in addition to the currently allowable total cost contract; and (ii) stipulate what each type of contract must include, such as specific hourly rates, percentage markups, and caps on the total cost, to align the regulation with industry standards.

18VAC50-22-260. Filing of charges; prohibited acts.

A. All complaints against contractors and residential building energy analyst firms may be filed with the Department of Professional and Occupational Regulation at any time during business hours, pursuant to § 54.1-1114 of the Code of Virginia.

B. The following acts are prohibited acts:

1. Failure in any material way to comply with provisions of Chapter 1 (§ 54.1-100 et seq.) or Chapter 11 (§ 54.1-1100 et seq.) of Title 54.1 of the Code of Virginia or the regulations of the board.

2. Furnishing substantially inaccurate or incomplete information to the board in obtaining, renewing, reinstating, or maintaining a license.

3. Failure of the responsible management, designated employee, or qualified individual to report to the board, in writing, the suspension or revocation of a contractor license by another state or conviction in a court of competent jurisdiction of a building code violation.

4. Publishing or causing to be published any advertisement relating to contracting that contains an assertion, representation, or statement of fact that is false, deceptive, or misleading.

5. Negligence or incompetence in the practice of contracting or residential building energy analyses.

6. Misconduct in the practice of contracting or residential building energy analyses.

7. A finding of improper or dishonest conduct in the practice of contracting by a court of competent jurisdiction or by the board.

8. Failure of all those who engage in residential contracting, excluding subcontractors to the contracting parties and those who engage in routine maintenance or service contracts, to make use of a legible written contract clearly specifying the terms and conditions of the work to be performed. For the purposes of this chapter, residential contracting means construction, removal, repair, or improvements to single-family or multiple-family residential buildings, including accessory-use structures as defined in § 54.1-1100 of the Code of Virginia. Prior to commencement of work or acceptance of payments, the contract shall be signed by both the consumer and the licensee or his the licensee's agent.

9. Failure of those engaged in residential contracting as defined in this chapter to comply with the terms of a written contract that contains the following minimum requirements:

a. When work is to begin and the estimated completion date;

b. A statement of the regarding total cost of the project with regards to the type of contract and the amounts and schedule for progress payments including a specific statement on the amount of the down payment; being specified:

(1) Standard total value project: a statement of the total cost of the project;

(2) Cost plus: a statement identifying the type of cost-plus contract, fee or percentage, and a cap at which the total dollar amount cannot exceed; or

(3) Time and materials: a fixed price for labor that includes wages, overhead, general and administrative costs, and cost of materials;

c. The amounts and schedule for progress payments, including a specific statement on the amount of the down payment;

d. A listing of specified materials and work to be performed, which is specifically requested by the consumer;

d. e. A "plain-language" exculpatory clause concerning events beyond the control of the contractor and a statement explaining that delays caused by such events do not constitute abandonment and are not included in calculating timeframes for payment or performance;

e. f. A statement of assurance that the contractor will comply with all local requirements for building permits, inspections, and zoning;

f. g. Disclosure of the cancellation rights of the parties;

g. h. For contracts resulting from a door-to-door solicitation, a signed acknowledgment by the consumer that he the consumer has been provided with and read the Department of Professional and Occupational Regulation statement of protection available to him consumers through the Board for Contractors;

h. i. Contractor's name, address, license number, class of license, and classifications or specialty services;

i. j. A statement providing that any modification to the contract, which changes the cost, materials, work to be performed, or estimated completion date, must be in writing and signed by all parties; and

j. k. Effective with all new contracts entered into after July 1, 2015, a statement notifying consumers of the existence of the Virginia Contractor Transaction Recovery Fund that includes information on how to contact the board for claim information.

10. Failure to make prompt delivery to the consumer before commencement of work of a fully executed copy of the contract as described in subdivisions 8 and 9 of this subsection for construction or contracting work.

11. Failure of the contractor to maintain for a period of five years from the date of contract a complete and legible copy of all documents relating to that contract, including the contract and any addenda or change orders.

12. Refusing or failing, upon request, to produce to the board, or any of its agents, any document, book, record, or copy of it in the licensee's possession concerning a transaction covered by this chapter or for which the licensee is required to maintain records.

13. Failing to respond to an agent of the board or providing false, misleading, or incomplete information to an investigator seeking information in the investigation of a complaint filed with the board against the contractor. Failing or refusing to claim certified mail sent to the licensee's address of record shall constitute a violation of this regulation.

14. Abandonment, defined as the unjustified cessation of work under the contract for a period of 30 days or more.

15. The intentional and unjustified failure to complete work contracted for or to comply with the terms in the contract.

16. The retention or misapplication of funds paid, for which work is either not performed or performed only in part.

17. Making any misrepresentation or making a false promise that might influence, persuade, or induce.

18. Assisting another to violate any provision of Chapter 1 (§ 54.1-100 et seq.) or Chapter 11 (§ 54.1-1100 et seq.) of Title 54.1 of the Code of Virginia, or this chapter; or combining or conspiring with or acting as agent, partner, or associate for another.

19. Allowing a firm's license to be used by another.

20. Acting as or being an ostensible licensee for undisclosed persons who do or will control or direct, directly or indirectly, the operations of the licensee's business.

21. Action by the firm, responsible management as defined in this chapter, designated employee, or qualified individual to offer, give, or promise anything of value or benefit to any federal, state, or local employee for the purpose of influencing that employee to circumvent, in the performance of his the employee's duties, any federal, state, or local law, regulation, or ordinance governing the construction industry.

22. Where the firm, responsible management as defined in this chapter, designated employee, or qualified individual has been convicted or found guilty, after initial licensure, regardless of adjudication, in any jurisdiction, of any felony or non-marijuana misdemeanor, there being no appeal pending therefrom or the time of appeal having elapsed. Any plea of guilty or nolo contendere shall be considered a conviction for the purposes of this subdivision. The record of a conviction received from a court shall be accepted as prima facie evidence of a conviction or finding of guilt.

23. Failure to inform the board in writing, within 30 days, that the firm, a member of responsible management as defined in this chapter, its designated employee, or its qualified individual has pleaded guilty or nolo contendere or was convicted and found guilty of any felony or of a Class 1 misdemeanor or any non-marijuana misdemeanor conviction for activities carried out while engaged in the practice of contracting.

24. Having been disciplined by any county, city, town, or any state or federal governing body, including action by the Virginia Department of Health, which action shall be reviewed by the board before it takes any disciplinary action of its own.

25. Failure to abate a violation of the Virginia Uniform Statewide Building Code (13VAC5-63).

26. Failure of a contractor to comply with the notification requirements of the Virginia Underground Utility Damage Prevention Act, Chapter 10.3 (§ 56-265.14 et seq.) of Title 56 of the Code of Virginia (Miss Utility).

27. Practicing in a classification, specialty service, or class of license for which the contractor is not licensed.

28. Failure to satisfy any judgments.

29. Contracting with an unlicensed or improperly licensed contractor or subcontractor in the delivery of contracting services.

30. Failure to honor the terms and conditions of a warranty.

31. Failure to obtain written change orders, which are signed by both the consumer and the licensee or his the licensee's agent, to an already existing contract.

32. Failure to ensure that supervision, as defined in this chapter, is provided to all helpers and laborers assisting licensed tradesman.

33. Failure to obtain a building permit or applicable inspection, where required.

34. Failure of a residential building energy analyst firm to ensure that residential building energy analyses conducted by the firm are consistent with the requirements set forth by the board, the U.S. Environmental Protection Agency, the U.S. Department of Energy, or the Energy Star Program.

35. Failure of a residential building energy analyst firm to maintain the general liability insurance required in 18VAC50-22-62 C at any time while licensed by the board.

36. Failure of a contractor holding the drug lab remediation specialty to ensure that remediation work conducted by the firm or properly licensed subcontractors is consistent with the guidelines set forth by the U.S. Environmental Protection Agency, Virginia Department of Environmental Quality, Virginia Department of Health, or Virginia Department of Forensic Science.

37. Failure of a contractor to appropriately classify all workers as employees or as independent contractors as provided by law.