Builder tells subs to cut prices mid-contract

BY ROBERT P. MADER Of CONTRACTOR's STAFF IRVINE , CALIF. Home builder Lennar Corp. has sent letters to its subcontractors in Southern California, Nevada and other states, telling them to cut their prices by as much as 20% and resubmit invoices for work not yet paid for. The letters said the subcontractors have a choice of either cutting their invoice prices or being shut out of bidding on Lennar projects

BY ROBERT P. MADER
Of CONTRACTOR's STAFF

IRVINE , CALIF. — Home builder Lennar Corp. has sent letters to its subcontractors in Southern California, Nevada and other states, telling them to cut their prices by as much as 20% and resubmit invoices for work not yet paid for. The letters said the subcontractors have a choice of either cutting their invoice prices or being shut out of bidding on Lennar projects for the next six months. In some cases the work has already been completed.

Lennar builds homes in 17 states, including New York, Florida, Texas and California under the names Lennar and U.S. Home.

Beth Curran, executive director of the California Professional Association of Specialty Contractors, Orange County/ Inland Empire, said Lennar's tactics amount to extortion and set a dangerous precedent. Many of the Lennar letters that CALPASC OCIE trade contractors received asked for up to a 20% reduction in contract prices after work had commenced and stated Lennar could cancel current contracts, halt scheduled work starts or send jobs out to be rebid.

Recipients were instructed to agree to the new terms, sign and return the letters. According to the letter, if a contractor does not respond, Lennar "will construe this as your decision not to participate in reducing your invoices. In doing so, this letter will serve as notice of cancellation for future contract(s) and bidding opportunities."

"This demand cuts deeply into the trades already slim profits and threatens local jobs and small businesses," Curran told CONTRACTOR. "Losing revenue for work already completed could force some businesses too far into the red."

Curran added that during the building boom, she never saw a letter from Lennar offering to share in its record profits. CALPASC chapters throughout California agree and have joined together in a call for action. In January, Lennar reported that for its fourth quarter and fiscal year ended Nov. 30, 2006, it had a net loss of $195.6 million, compared to net earnings of $581.2 million in 2005.

CALPASC questions the legality of Lennar's actions and has requested legal opinions from district attorneys in San Diego, Los Angeles, Orange, Riverside and San Bernardino counties. The California attorney general has been contacted and specifically asked to investigate Lennar and its tactics.

"If they are under contract to them, it's probably a breach of contract," said Susan McGreevy, a partner in Husch & Eppenberger, Kansas City, Mo., and CONTRACTOR's legal columnist. "You can't have the luxury of going back under a contract and asking to change the terms."

While it is not unusual for conversations between builders and trades to result in price changes due to market and cost fluctuations, CALPASC members say they have never before received letters warning that noncompliance may prohibit them from bidding on new jobs.

"Our members frequently negotiate with contractors to keep costs down, but to ask for concessions retroactively with the threat of no future work is, at the very least, unreasonable and unethical," Curran said. "CALPASC OCIE is not going to keep quiet while the burden of industry down times is shifted onto our members' backs in this manner."

During the boom, Lennar didn't offer to share its profits.

Mark Sustana, Lennar's general counsel, said it's not a breach of contract, but rather a voluntary negotiation that's allowed under the terms of the contract. Sustana said Lennar has asked for price reductions in all 17 states in which it builds. He said he has also asked for price reductions from all the law firms he uses and 95% by dollar volume have agreed.

Lennar's subcontract language allows it to terminate in mid-stream, pay for the work performed and rebid the work, Sustana said.

CONTRACTOR interviewed two of Lennar's plumbing subcontractors who requested anonymity because they feared retribution from Lennar if they were identified.

"Basically, they sent a letter out that said as the customers are paying us a lower price for our homes, we must pay you lower price for services," said an Orange County plumber with more than 200 employees. The contractor performs residential new construction work for a dozen builders and Lennar constitutes 5% of his work.

"So they gave us a choice of either reducing all unpaid invoices under current contracts by a percentage that varies from contractor to contractor, but it's a range of 3% to 20%," the contractor said. "This is for work that we had already been lowest bidder on and it was ongoing like the fourth or fifth phases of the project. Lennar already demanded a 5% decrease from the previous phase, so this is the second time they've come to the well. They're not a huge book in my business but I know roofers or concrete people that it's 50% or more of their work."

The contractor gave Lennar what it wanted but he doesn't know if he wants to bid any new work for the builder. He noted that the situation is difficult for plumbing contractors because they're on a job for six months. They get a draw for the underground, a draw when the framing is done and a draw after the fixtures are set. An HVAC contractor, he noted, can get in and out in three to six weeks, and many of them may have already gotten their money before the letters went out.

An Inland Empire plumbing contractor with more than 200 employees told CONTRACTOR that he received a California letter and a Nevada letter, although the Nevada letter was not as onerous. The contractor performs all new construction for 50 to 60 builders and plumbs about 8,000 houses a year in California and Nevada. Lennar is about 10% of his business.

Sustana said the letters differ because Lennar gives its divisions a certain amount of autonomy.

The plumbing contractor's California letter told him that he would have to reduce his price on outstanding invoices by 8% to10% or else get shut out of bidding for six months. The Nevada letter said that he had to cut his pricing — not outstanding invoices, but pricing — by 10% or else his work would be rebid. The Nevada letter did not threaten to ban him from bidding for any period of time.

The contractor told Lennar "no" in both states and said the word on the street is that many subs have rejected Lennar's demand. He said he would have to replace the work, but he was not going to work for Lennar if that meant losing money.

Sustana said he doesn't know what percentage of Lennar's subcontractors have agreed to the cuts.