The Texas Construction Association (TCA) Legislative Update
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Texas Legislative News – March 2017
Texas Construction Association (TCA) Priority Legislation
Lien Law Modernization
HB 3065 by Representative Joe Deshotel (D-Beaumont) was filed in early March and now awaiting referral to a House Committee. SB 1506 by Senator Juan “Chuy” Hinojosa (D-McAllen) was referred to the Senate Business and Commerce Committee to await a hearing. Of all the states, Texas has the most burdensome and complex lien law scheme. The Texas Constitution, as adopted in 1876, in part, states that “Mechanics, artisans and materialmen, of every class, shall have a lien upon buildings and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor[e]; and the Legislature shall provide by law for speedy and efficient enforcement of said liens.” In line with the Texas Constitution, the Texas Legislature has enacted laws dealing with the statutory lien rights for people furnishing labor and material on private work.
The Texas lien law system needs to be modernized and simplified so that the construction team on a project will be better able to comply with the law and secure their lien rights. Some of the changes that should be considered include an early notice system that is consistent with many other states, eliminating several confusing concepts unique to Texas, and providing owners, contractors, claimants, lenders, suppliers and title companies with more timely and accessible information regarding projects via an Internet portal. The law should no longer require fund-trapping notices or retainage. This modernization will provide a more reliable close-out procedure which will result in fewer perfected lien claims on projects.
Responsibility for Defective Plans and Specifications
HB 2170 by Representative Kyle Kacal (R-College Station) was referrred to House Ways & Means committee. SB 1215 by Senator Bryan Hughes (R-Mineola) was referred to the Senate State Affairs Committee on March 9 and is waiting to be set for a hearing in that committee. Although dealing with the same subject, each bill takes a different approach. HB 2170 creates an implied warranty for the accuracy, adequacy, sufficiency, and suitability of the plans and specifications that the owner gives to the construction team. SB1215 is intended to keep the construction team from being responsible for the consequences due to defective design plans and specifications.
Priority Retainage
HB 2668 by Representative John Wray (R-Waxahachie) was referred to House Business & Industry. SB 2073 by Senator Jose Rodriguez (D-El Paso) is now co-authored by Senator Jose Menendez and currently waiting to be referred to a Senate committee.
Texas law requires non-public property owners to withhold 10% of the value of the work that is performed by a contractor and subcontractor under a construction contract until completion of the work. This 10% amount is called retainage. In situations where a lender is providing construction financing, typically a lender only funds a loan amount for 90% of the value of the work each month and does not fund the remaining 10% until the project is finished. When a loan default occurs, the 10% not funded by the lender does not get paid to the construction team.
Often, owners assume the 10% not funded by the bank to be retainage. It is not. If the owner of a construction project funds construction with a loan from a lender and the 10% retainage is not transferred to the owner each time the lender advances loan proceeds, then contractors and subcontractors and others entitled to the retainage often do not get paid if the lender forecloses on the construction loan.
Right to Repair
HB 2343 by Representative Paul Workman (R-Spicewood) was referred to House Judiciary and Civil Jurisprudence on March 20.
From time to time, construction defects occur on construction projects. In Texas, the property owner is not required to provide notification to the construction team prior to filing a lawsuit or initiating an arbitration proceeding for a claim that alleges a defect in construction.
Representative Workman’s bill will require that, before a suit or arbitration is filed, a person making a claim for damages caused by an alleged construction defect must 1) provide a notice to the contractor; 2) obtain an inspection of the alleged defect by a professional engineer and allow the contractor to attend the inspection; 3) obtain a written report from the engineer concerning the alleged defect; 4) allow 150 days after the date of the report to correct any construction defect identified in the report. The court or arbitrator is required to dismiss a claim if the above items are not followed by the claimant.
State Breach of Contract
Generally, statutes allowing for the breach of sovereign immunity defense restrict or prevent the recovery of attorney fees absent a contractual agreement for them. HB 2128 and HB 2121, both by Representative John Cyrier (R-Bastrop), make amendments to existing statutes governing immunity from lawsuit by governmental entities and the recovery of attorney fees in those types of lawsuits. Both bills were referred to the House Judiciary and Civil Jurisprudence Committee on March 13 and are now waiting to be set for a hearing in that committee.
Statute of Repose
HB 1053 by Representative Morgan Meyer (R-Dallas) will be heard in the House Judiciary and Civil Jurisprudence Committee on March 28.
The Statute of Repose is a statutory way to cut off legal rights if they are not acted on by a certain deadline. In Texas, the Statute of Repose requires a person to file suit against a contractor for a construction defect during the first 10 years after substantial completion of the project. During this 10-year period, contractors are liable for damages, injury or death which arise from a deficiency in the construction or repair of an improvement to property.
While it is important that there be a finite time limit during which a claim for a construction defect can be brought against a contractor, 10 years is a long time to have potential liability issues hanging over the construction team. The odds are low that a true defect in construction will arise after 5 years. After 5 years, the line between defect and wear and tear gets very blurry. Improper or lack of maintenance to a building also presents a complicating factor. Importantly, documents and witnesses tend to be less available and harder to produce as time goes by. Also, on projects covered by a consolidated insurance program, the state only requires coverage for completed operations (the type of insurance that may provide coverage for after construction claims) for up to 3 years. Thus, contractors on these projects most often have no insurance for the years 4-10 that the consolidated insurance program does not cover.
Furthermore, to combat the lawsuits that are manufactured by consultants in the 9th year of a 10- year statute of repose, a shorter statute period will increase the odds of a defendant being able to produce documents and witnesses with first-hand knowledge of the construction. A shorter time frame will lessen the likelihood that the case is a “shakedown” of construction companies’ insurance and instead be a true case on whether there is a true construction defect. HB 1053 will reduce the Statute of Repose in Texas from 10 years to 5 years.
Other Construction-Related Legislation Being Followed
HB 1304 by Representative Oscar Longoria (D-Mission) and SB 592 by Senator Eddie Lucio, Jr. (D-Brownsville) would establish a rebuttable presumption of employment relating to the classification of workers under the Texas Unemployment Compensation Act. The bills call for a penalty of $200 per employee to be assessed against employers who misclassify their employees. HB 1304 is in the House Economic and Small Business Development Committee awaiting a hearing. SB 592 is in the Senate Natural Resources and Economic Development Committee awaiting a hearing.
HB 1477 by Representative Armando Walle (D-Houston) requires workers’ compensation insurance coverage for building and construction contractors. This bill was referred to the House Business & Industry Committee on March 7 and is waiting to be set for a hearing in that committee.
SB 23 by Senator Charles Schwertner (R-Georgetown) will require state contractors to participate in the federal electronic verification of employment authorization program, or E-Verify. The bill was voted favorable from the Senate Business & Commerce Committee and placed on the intent calendar.
HB 2689 by Representative Jim Murphy (R-Houston) will amend the Government Code to allow a third party to conduct prevailing wage surveys for determining prevailing wage rates for public works contracts and must be conducted within a three-year period preceding the date the public entity calls for bids on a public works project. This bill was referred to Business and Industry.
HB 3020 by Representative Cyrier will amend the Education Code to require school districts to give timely written notice to parties when the district brings an action for recovery of damages for the defective design, construction, renovation, or improvement to an educational facility. This legislation was filed on March 6 and is waiting to be referred to a House committee.
HB 3357 by Representative Ramon Romero, Jr. (D-Fort Worth) would amend the Government Code and set a fine of $90 per worker misclassified on a public works project. This bill was filed on March 8 and is waiting to be referred to a House committee.
HB 3434 by Representative Linda Koop (R-Dallas) would amend the Education Code to adopt uniform general conditions that will be incorporated in all building construction projects undertaken by school districts. This bill was filed on March 8 and is awaiting referral to a House committee.
HB 3913 by Representative Hugh Shine (R-Temple) was filed on March 10 and is now waiting to be referred to a House committee. The legislation would amend the Government Code relating to public works projects to require a governmental entity to hold no more than 5% retainage on a project with a total value of $1 million or more, and if the governmental entity obtains beneficial use of the project, the retainage withheld cannot exceed 2% of the contract price. On projects where the total value of the contract is less than $1 million and the public entity has beneficial use of the project, the retainage may not exceed one-half of the total retainage under the contract.
