TCA Legislative Issues for 2019 - 86th Legislative Session
SB15/HB 1654 Consistent Employment Regulations. Local governments that enact ordinances that regulated private employment practices create a patch-work of regulations for private, small businesses. The state should preempt local ordinances that attempt to regulate the employer/employee relationship.
HB 258 Lien Law Modernization. The Texas construction lien law system needs to be modernized to enable general contractors and subcontractors to more easily comply with the law without having to engage legal counsel for each project. The original intent of the lien law system was to provide a statutory remedy to secure payment for labor, materials, or machinery furnished in the improvement of property. However, this has been lost in, among other issues, the different notice requirements and deadlines placed on claimants to secure their lien rights. Sound changes include an early notice system that would be consistent with many other states, eliminating confusing concepts unique to Texas such as statutory retainage, and providing owners, contractors, subcontractors, lenders, suppliers and title companies with more timely and accessible information regarding projects via an Internet portal.
Responsibility for Defective Plans and Specifications. Texas is the only state in the union where, a contractor may bear the liability for defects in construction that are based on construction documents prepared or procured by the owner or the owner’s agent or design professional. The construction team should not be liable for construction that is defective due to erroneous documents furnished by the owner. In fact, contractors are statutorily prohibited from preparing or altering engineering or architectural design plans and specifications. Statutory changes are needed to clarify that the construction team is only liable for defects resulting from construction errors.
Securing Retainage. Retainage, the amount an owner retains each month from a payment for work performed (usually 10%), is tantamount to a loan from the contractor or subcontractor to the owner. The person provides a full month’s work, yet gets paid only 90%. By retaining a portion of funds owed until the end of a project, the owner is able to avoid drawing those funds from a financial institution, thereby avoiding interest and other costs. In Texas, the construction team’s retainage is not protected if the lender forecloses on the construction loan. Therefore statutory changes are necessary to ensure that retainage is secured, and survives the foreclosure of the bank’s lien on a project.
Notice and Right to Correct. Currently, a property owner can initiate a lawsuit or arbitration over an alleged construction defect without prior notice to the contractor. A statute that provides for notice of possible defects, a timeframe for inspection by the contractor, and a right to repair the alleged defect will greatly reduce unnecessary lawsuits, but not prevent a lawsuit when a dispute over a construction defect cannot be otherwise resolved.
Documents Incorporated by Reference. Construction contracts often incorporate other documents by reference without, at the time of signing, including a copy of the incorporated documents with the contract. Statutory direction is necessary to avoid having a contractor or subcontractor be held responsible for the contents of documents that are not provided at the time of contract.
HB1737 Statute of Repose. A construction team is currently exposed to 10 years of liability for construction defects. Disputes arise as to whether a defect was caused by defective construction, poor maintenance, or normal obsolescence. Reducing the period of liability from 10 years to 8 years for latent defects and 6 years for patent defects will bring Texas in line with a majority of other states, will lower litigation costs and insurance costs related thereto, yet allow for a reasonable period of time for construction defects to be determined. These savings can be passed to an owner through lower construction costs.
Legislative Issues for 2017 – 85th Legislative Session
When the 85th Texas Legislature adjourned sine die on May 29, 2017, a number of construction-related issues that will have a significant impact on the industry were addressed. A discussion of those issues can be found below.
State Breach of Contract. Statutes governing immunity from lawsuit by governmental entities were amended to allow the recovery of attorney fees in lawsuits for breach of contract claims under $250,000. Read HB 2121 text. HB 2121 was effective on June 15, 2017.
School Background Checks. Legislation was passed to establish when state mandatory background checks will apply for school construction projects. Under the new law, workers on school construction projects will no longer be required to submit to a criminal background check if they are working on greenfield projects, non-instructional facilities or secure job sites at existing schools. Read HB 3270 text. HB 3270 was effective on September 1, 2017.
Choice of Law and Venue for Certain Construction Contracts. Prior to the passage of this legislation, Texas gave a contractor and subcontractor the ability to void a clause in a construction contract that required disputes to be decided under the law of another state, or for the dispute to be heard in another state, if the project is located in Texas. The law didn’t apply to all project participants. This bill broadens the coverage of the law to include all project participants, including architects, engineers, suppliers and equipment rental companies. Read SB 807 text. SB 807 was effective September 1, 2017.
Pathways in Technology College High School Program (P-TECH). Legislation was passed to address a recent evaluation of the effectiveness of the state’s current tech-prep education program that determined that while student performance in certain areas had improved, more needed to be done to improve student postsecondary achievement and labor market outcomes. This legislation establishes a Pathways in Technology Early College High School Program for students who wish to participate in a work-based education program. Read SB 22 text. SB 22 was effective September 1, 2017.
Insurance for Businesses Participating in CTE Programs. Legislation was passed to authorize school districts or the governing body of an open-enrollment charter school to obtain accident, liability or automobile insurance coverage to protect a business or entity that partners with the school district or charter school to provide students career and technology education (CTE) training, as well as the district or school that participates in the CTE program. Read HB 639 text. HB 639 was effective May 26, 2017.
Lien Law Modernization. The Texas lien law system needs to be modernized so that the construction team on a project would be better able to comply with the law and protect their lien rights. Legislation was filed that would have made changes to the lien law that included an early notice system that would be 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. Read HB 3065 text. HB 3065 died in the House Calendars Committee.
Responsibility for Defective Plans and Specifications. In Texas, if construction work turns out to be defective due to an error in the plans and specifications, the contractor bears the responsibility for the consequences for the defective designs. In Texas, contractors are not licensed to prepare construction drawings, but because of two Texas Supreme Court cases, a person who is not allowed by law to prepare the documents is being required to warranty those documents. Legislation was filed that would have established in law that the construction team should not be liable for construction that is defective due to erroneous documents furnished by the owner. Read SB 1215 text. A version of SB 1215 that differed from the original version of the legislation passed by the Senate and approved by the House Business & Industry. The new version of the bill was passed by the House and the Senate concurred in the changes of SB 1215. Governor Greg Abbott vetoed SB 1215.
Priority Retainage. In Texas, the construction team’s retainage is not protected if the owner defaults on the loan or the lender forecloses on the loan. Legislation was filed that would have recognized retainage for what it is: a loan to the construction owner by the construction team. The bill would have protected retainage in a similar fashion as the lender protects its construction loan. It would have accomplished this by providing a priority to a lien for retainage that is equal to the priority to a lender’s deed of trust for the construction loan. Read HB 2668 text. HB 2668 died in the House Calendars Committee.
Right to Repair. Legislation was filed that would have required that, before a suit is filed or arbitration is initiated, 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 the attend the inspection; 3) obtain a written report from the engineer concerning the alleged defect; and 4) allow 150 days after the date of the report for the contractor to correct any construction defect identified in the report. The court or arbitrator would have been required to dismiss a claim if the above items were not followed by the claimant. Read HB 2343 text. HB 2343 died in the House Calendars Committee.
Statute of Repose. Legislation was filed that would have reduced the Statute of Repose in Texas from 10 to 5 years. Read HB 1053 text. HB 1053 died in the House Judiciary & Civil Jurisprudence Committee.
Attorney Fees. Legislation was filed that would have amended Chapter 38 of the Civil Practice & Remedies Code to add “other organization” to Sec. 38.001(a) so attorney fees could be recovered from an individual, corporation or other organization, including partnerships and LLCs, for claims for services, labor or materials. Read HB 744 text. HB 744 was passed by the House but died in the Senate State Affairs Committee.
Legislative Issues for 2015 - 84th Legislative Session
Prior to the start of the 84th Legislative Session of the Texas Legislature in 2013, TCA and other construction industry associations again had a very ambitious agenda to be addressed by the Legislature, as had been the case in previous sessions. In line with those previous sessions, TCA began the 84th Session with another strong agenda in 2015 that included four high priority issues and several additional construction-related issues.
When the Legislature adjourned sine die on June 1, 2015, it had addressed a number of construction-related issues that had a significant impact on the industry. A discussion of those issues can be found below.
Consolidated Insurance Programs. The Insurance Code was amended to require the principal of a Consolidated Insurance program (CIP) to provide certain information about the CIP to a contractor who is to be enrolled in the CIP not later than 10 days before the date the contractor enters into a construction contract. This information allows the contractor to compare the coverage provided by the CIP to the contractor’s own insurance and allows the contractor to make an informed decision on whether or not to enter into the construction contract. Read SB 1081 text. SB 1081 was effective on January 1, 2016.
Public-Private Partnerships (P3). Legislation was passed that established a center for alternative finance and procurement within the Texas Facilities Commission to consult with government entities regarding best practices for procurement and financing of qualifying P3 projects. Read HB 2475 text. HB 2475 was effective on September 1, 2015.
Pre-Litigation Requirements for Condominium Owners’ Associations in Defect Cases. Condominium units owners’ associations that have eight or more units will be restricted from filing lawsuits or initiating arbitration proceedings to resolve a claim relating to the construction or design of a unit on behalf of all of the owners unless the owners’ association obtains a written report from an independent third-party report identifies and describes the condition of the specific units or common elements that are subject to the claim and obtains the approval of owners holding at least 67 percent of the total votes in the association at a special meeting in order to file a lawsuit or initiate arbitration proceedings. Read HB 1455 text. HB 1455 was effective on September 1, 2015.
Workforce and Education Legislation. TCA supported several workforce and education bills that addressed needs in the Texas public education system to better serve career path development and support. Some of the bills that passed were: College and Career Readiness for School Counselors and Lifting the Cap on Dual Credit Courses.
Lender Notice of Default. A lender should be required to give notice to contractors who in turn would give notice to subcontractors, that the lender has determined that it will no longer disperse funds that are part of the loan for the construction project. Legislation that was filed would have allowed the contractor and subcontractors the opportunity to stop working on a project when this notice is given. Read HB 1208 text. HB 1208 died in the House Calendars Committee.
Retainage Trust Fund. A project owner should be required to set aside in a separate trust account the retainage amount not paid each month to contractors and subcontractors for construction costs during the life of a project to ensure that those contractors and subcontractors will be paid the retainage to which they are entitled. In the alternative to setting aside the retainage in a trust account, the owner could purchase a retainage bond. Read HB 1966 text. HB 1966 died on the House Calendar.
Worker Classification. On their first offense, an employer who misclassifies an employee should be fined $100 per employee not properly classified. If the employer would again be found to be in violation of the law, the Texas Workforce Commission should fine that employer up to $1,000 per employee. Read HB 434 text. HB 434 died in the House Business and Industry Committee.
Issues from the 83rd Legislative Session (2013)
In 2011, TCA and other construction industry associations went into the Regular Session of the Texas Legislature with a very ambitious legislative agenda that included six major issues to be addressed. Despite significant opposition to those initiatives, subcontractors and suppliers were successful in passing legislation on four of those major issues. Not wanting to let up its advocacy efforts, TCA embarked on another ambitious agenda in 2013 that included four high priority issues and three additional construction-related issues.
In addition to TCA’s priority issues and other construction-related issues, there was one major issue the TCA Board of Directors believed was paramount to any other advocacy work in 2013—to preserve the success and progress that was gained in 2011 and not allow those gains to be diminished through legislative action. None of those gains were lost or diminished.
When the 83rd Texas Legislature adjourned on May 27, 2013, it had addressed several issues that had a significant impact on the construction industry. In addition, one of those issues addressed in 2013 came under the purview of the Texas Comptroller. Those issues are listed below, along with a link to the bills dealing with each of them.
Franchise Tax. Effective June 5, 2013, the Texas Comptroller revised Franchise Tax Rule §3.588 concerning the Cost of Goods Sold (COGS) deduction. Under the revised rule, taxpayers may now include as COGS both direct labor costs and those indirect labor costs, other than service costs, that are subject to capitalization under Internal Revenue Code (IRC) §263A and its regulations.(http://info.sos.state.tx.us/pls/pub/readtac$ext.TacPage?sl=T&app=9&p_dir=F&p_rloc=162138&p_tloc=14787&p_ploc=1&pg=2&p_tac=&ti=34&pt=1&ch=3&rl=588)
In addition, you may want to go to http://www.window.state.tx.us/taxinfo/franchise/faq_cogs.html to see frequently asked questions regarding Franchise Tax Rule §3.588.
State Breach of Contract. The state’s immunity in construction contract disputes has now been waived. For disputes of $250,000 or more, state district court will be an option for resolution of the claim. For disputes under $250,000, the state office of administrative hearings, commonly known as SOAH, will be the venue. Read HB 586 text. HB 586 was effective on September 1, 2013, and applies only to a claim arising out of a contract executed on or after September 1, 2013.
Career and Technical Education Programs in Public Schools. High school graduation requirements now have curriculum flexibility to allow training and preparing public school students for various certifications and careers in the different segments of the construction industry as well as in other Texas industries, professions and careers. Read HB 5 text. Some portions of HB 5 were effective June 10, 2013, with other provisions effective September 1, 2013.
Worker Classification Under Government Contracts. Employers awarded a contract for public works must ensure that any individual performing services under that contract for that employer is properly classified as an employee or independent contractor. An employer who misclassifies is now subject to a $200 fine for each individual misclassified. Read HB 2015 text. HB 2015 became effective on January 1, 2014.
Exclusion of Certain Flow-Through Funds from the Franchise Tax. Subcontractor payments related to real property improvements and remediation projects can now be excluded in determining the taxable entity’s total revenue for purposes of the franchise tax. Read HB 2766 text. HB 2766 became effective on January 1, 2014.
Retainage Trust Fund. A project owner should be required to set aside the retainage amount not paid each month in a separate trust account for the benefit of construction firms that provide labor and materials to a project. HB 3316 was the legislation that dealt with this issue. Read HB 3316 text. HB 3316 died on the House floor.
Lender Notice of Default. A lender should be required to give subcontractors and prime contractors notice of an owner’s default on a construction loan. This notice will allow for work to be suspended until the default is cured. This will reduce the construction team’s exposure to enriching a lender without hope of getting paid. SB 295 and its companion legislation, HB 2180, dealt with this issue. Read SB 295 text. SB 295 died in the Senate Business & Commerce Committee.
Lien Law Reform. Texas lien laws are considered by many to be the most burdensome and complex in the country. There are a number of requirements in the laws that trip up subcontractors and suppliers and, in effect, result in the loss of certain lien rights available to them. SB 1281 and HB 3553 would have simplified the processes and procedures for perfecting and maintaining one’s lien rights. Read SB 1281 text. SB 1281 died in the Senate Business & Commerce Committee.
Worker Classification. An employer working on a private construction project is required by law to classify individuals working on the project as employees or independent contractors. The current laws provide minimal penalties to employers who violate the law related to properly classifying individuals working on a construction project. HB 1925 would have strengthened the penalties for misclassification of employees working on construction sites. Read HB 1925 text. HB 1925 died in the House Calendars Committee.
Issues from the 82nd Legislative Session
The 82nd Texas Legislature adjourned its Regular Session on May 30, 2011. During the 140-day Session, legislators addressed a number of TCA high priority issues set by the Board of Directors for the Texas Construction Association. Those issues are listed below, along with a link to the bills dealing with each of them. In addition to passing TCA's priority bills, the 82nd Legislature passed several other bills affecting the construction industry directly.
Broad Form Indemnification. â€‹A clause found in construction contract provides that the subcontractor indemnifies the general contractor or owner for the general contractor's or owner's wrongdoing even though the subcontractor may have done nothing improper. These clauses, known as broad form indemnity clauses, and certain additional insured endorsements should be made void and against the public policy of Texas. These indemnification clauses are in direct conflict with the concept that the company should be responsible for its negligent acts. SB 361 & HB 2010 were the original bills filed to address these issues, but the language from SB 361 was later amended into HB 2093, which was passed by both the House and Senate and signed by Governor Perry. Read HB2093 text. HB2093 was effective on January 1, 2012.
Consolidated Insurance Program (CIPs). Known typically as Owner Controlled or Contractor Controlled Insurance Programs, the use of these "Wrap-Up" programs are increasing in Texas. While possibly a money saver for the Owner, CIPs are plagued by poor adminsitration, gaps in coverage or lack of coverage, insufficient limits, questionable safety and back to work programs, and auditing practices that cause subcontractor's retainage to be withheld even longer than usual. In many cases, the exposure a subcontractor faces working on a CIP is unknown. The Legislature should establish minimum standards for CIPS. HB 2093 &1337 were the original bills filed dealing with CIPs, but late in the session, HB2093 became the "vehicle" for the indemnification bill (SB 361). Read HB 2093 text. HB2093 was effective on January 1, 2012.
Lien Law Reform. Texas has the most complicated lien laws of any of the 50 states. Our lien laws should be reformed to make them much less complicated and much more user friendly. The lien law issues which should be addressed include the following:
-Lien Wavers. Prohibit the waiver of a person's lien rights prior to getting paid for work performed or materials supplied. HB1456 is the lien waiver bill passed by the legislative and signed by the governor. Read HB 1456 text. HB 1456 was effective on January 1, 2012.
-Retainage Lien. The process to establish a lien for retained funds should be revised to provide a less onerous system for subcontractors, general contractors, and owners. HB 1390 is the retainage lien bill passed by the Legislature and signed into law by Governor Perry. Read HB1390 text. HB1390 was effective on September 1, 2011.
Retainage Trust Fund. Require retainage to be held in trust for the benefit of construction firms that provide labor and materials to a project. HB1425 was the bill that dealt with this issue, but it did not pass. Read HB 1425 text. HB 1425 died in the House Calendar Committee.
Loan Default. A lender should be required to give subcontractors and prime contractors notice of an owner's default on a construction loan. This notice will allow for work to be suspended until the default is cured. This will reduce the construction team's exposure to enriching a lender without hope of getting paid. Read HB 3040 text. HB3040 died in the House Calendar Committee.